Introduction and Changes made to the Corporate Insolvency & Governance Act 2020
23 November 2020 by Billy Smith
This blog discusses some of the measures put in place to help business survival and build economic resilience through the COVID-19 pandemic; the Corporate Insolvency and Governance Bill that received Royal Assent on 25th June 2020 and The Corporate Insolvency and Governance Act (CIG) which came into force on 26th June 2020. Secondary legislation in the form of The Corporate Insolvency and Governance Act (Coronavirus) (Extension of the Relevant Period) Regulations 2020 and The Corporate Insolvency and Governance Act (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020 also came into effect on 29th September and 1st October 2020 further supplemented the statutory framework. The legislation introduces both temporary provisions linked to the coronavirus pandemic and more permanent changes to the insolvency framework. In the legislation, there are two significant temporary measures for companies facing financial difficulties in these uncertain times.
We look below at the headline changes and measures.
New Statutory Moratorium
A moratorium is a legal ban which restricts certain creditor enforcement action for a period of time to allow a company in financial difficulty the chance to implement restructuring.
Prior to the CIG, this was only available in the UK to:
- (i) companies in administration, protecting the company against creditor action except with the consent of the administrator or by making an application to court;
- and (ii) for certain small companies who had made a proposal for a company voluntary arrangement.
A new moratorium under the CIG Act is available for all companies except for insurance companies, banks, and certain other financial institutions and (after 30th September 2020) companies which were previously subject to a Moratorium or certain formal insolvency procedures in the last 12 months.
Foreign companies are also eligible provided they can demonstrate a sufficient connection to England.
Qualifying companies must have:
- “….encountered or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern…”
The CIG moratorium can be extended by a further 20 days without consent or by up to 12 months subject to creditor consent being obtained or a Court application being made.
Following the enactment of the further supplementary legislation, referred to above, only companies capable of being rescued can now qualify for moratorium.
New Restructuring Plan
A significant change implemented by the CIG is the introduction of the Restructuring Plan, which may be utilised by businesses which encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern.
There is also recognition given to and mechanism provided for preventing “class-cram down” – where the limitations of a UK Scheme was its inability for entire dissenting classes of shareholder were bound by the vote of other classes – and so court oversight is built into Restructuring Plans.
Companies in financial difficulty can now propose Restructuring Plans, and arrangement can be made between a company and its creditors and shareholders to adjust proposals but in any contested Restructuring Plan, the choice of relevant alternative may be heavily reliant on valuation evidence and maybe an area for challenge by a dissenting creditor or shareholder.
Another permanent measure is a ban on ipso facto clauses which would otherwise permit suppliers of goods and services from terminating or varying supply to a company due to the commencement of insolvency and restructuring procedures.
Other Temporary Measures
Termination Clauses in Supply Contracts
Ipso Facto Clauses
Ipso facto clauses are provisions in contracts which entitle a party to terminate or vary their terms upon the occurrence of an insolvency event relating to the other party. Such clauses may also operate automatically, without any party needing to make an election. It can be seen that if such clauses were permitted to prevail suppliers could simply pull the plug on further supply to an ailing company and adversely affect that company’s ability to recover or rescue the business for sale as a going concern in the future.
Ipso facto clauses will not impact the ability of the entity itself or its administrator from terminating a contract if, otherwise, the right to do so exists and there should be no impact on the right of a liquidator to terminate an unprofitable contract unilaterally by disclaimer.
In the case of an administration or liquidation, this ability to terminate could be crucial to prevent the creation of expenses of the administration or liquidation (which carry priority status in an administration or liquidation) and which rank ahead of the administrator or liquidator’s own remuneration.
There are various exemptions. One that applied is too small suppliers who are not obliged to supply until an extended period to 30th March 2021, thus providing them with some insulation.
Under section 122(1)(f) of the Insolvency Act 1986 (the Insolvency Act), a company may be wound up by the court if it is unable to pay its debts.
The CIG Act limits the ability to commence winding-up proceedings where COVID-19 has had a financial effect on the company.
Between 1st March 2020 and 30th September 2020, the CIG Act limited the ability to commence winding-up proceedings where COVID-19 had a financial effect on the company.
Filings at Companies House
Directors were provided with extended time within which to file accounts and reports with the Registrar at Companies House (i.e. from 26th March 2020 to whichever is sooner than 30th September 2020 or the last day of the period of 12 months preceding the relevant accounting period).
AGMs can now be held virtually up to 30th December 2020.
Statutory Demands and Winding-up Petitions
Significantly, the legislation prevents the service of statutory demands and the presentation of winding up petitions where the reason for the debt is COVID 19. The relevant period for this protection has been extended to cover between 27th April 2020 and 31st December 2020.
In order to present a winding-up petition to the Court, a creditor would now need to prove that the debtor company was not affected by COVID 19 or the debt would have still arisen notwithstanding the impact that COVID 19 may have had on that company.
As to the advertisement of winding petitions from 26th June 2020 up to 31st December 2020, the Courts would need to determine whether it would likely make the winding-up order against the debtor company.
The courts do seem keen to act with purpose towards the spirit of the CIG. Before the implementation of the CIG, I was instructed by a company that successfully secured an injunction restraining the advertisement of a winding-up petition on the basis that to do so would have been anti the spirit of the new [at the time] prospective legislation (which came into force just 7 days later).
Fisher Jones Greenwood LLP’s Dispute Resolution team is able to assist clients with all their corporate insolvency and governance queries and provide commercially focused, practical advice on the options available. For further advice, please contact Fisher Jones Greenwood on 01206 700113 or email [email protected].
For more information on legal issues that have arisen as a result of the COVID-19 pandemic, visit our Coronavirus Legal Advice hub.