The Corporate Insolvency and Governance Act 2020 – At a Glance29 Jun, 2020 - Dispute resolution | by Grosvenor Law
The Corporate Insolvency and Governance Act 2020 (the “Act”) came into force on 26 June 2020, a few days ahead of schedule. This is the biggest shake up to the insolvency landscape since the Enterprise Act came in to effect 2003.
Importantly, the Act does not just contain temporary measures to deal with the COVID-19 crisis but also seeks to implement some permanent changes.
The purpose of this blog is to give a brief overview of the changes as they relate to insolvency proceedings and companies in financial difficulties with a particular emphasis on the permanent changes:
- A Moratorium to give companies in financial difficulty some breathing space in which to explore their options. During the moratorium, legal action can only be taken against the company with the permission of the court and this includes any action to enforce security. The initial moratorium period is 20 business days but that period can be extended up to a year. While the directors will remain in charge of the company during the moratorium, the process will be overseen by a licensed insolvency practitioner. This is a permanent reform.
- A Restructuring Plan for companies that do, or are likely to, find themselves in financial difficulties such as to affect their ability to continue to trade as a going concern. While similar to the existing scheme of arrangement, there are some important differences, not least a mechanism for “cramming down” creditors of different classes in certain circumstances. This is also a permanent reform.
- Restrictions on the use of insolvency termination clauses in contacts by suppliers in order to terminate or vary the terms of the contract. In short, and subject to certain exceptions, suppliers will be obliged to continue to supply goods or services to companies in insolvency or restructuring processes. This is in the hope that the company will be able to trade through the relevant process and, ultimately, survive. However, the company is still required to pay for the goods and services and termination is permissible, with the permission of the court. There are some exceptions to this general position, including a temporary exemption for small company suppliers where their contractual counterparty goes into insolvency before 30 September 2020 (although this date may be extended). A company is a small company supplier if it meets two of the following tests: a) turnover less than £10.2m; (b) a balance sheet total of less than £5.1m; and (iii) less than 50 employees. This is a permanent reform.
The Act also contains certain temporary measures designed to assist businesses during these uncertain times. The first of these relates to wrongful trading. While the existing wrongful trading provisions of the Insolvency Act 1986 will remain in full force and effect, the Act directs the Courts to assume that directors are not responsible for any worsening of the company’s financial position in the period from 1 March 2020 to 30 September 2020. While the Act reduces the threat of personal liability of directors who trade through the COVID-19 crisis, it does not remove it entirely.
The Act also introduces restrictions on the use of statutory demands and winding-up petitions in circumstances where the debtor company’s financial difficulties giving rise to the petition are a result of COVID-19. As such, any petitioning creditor seeking a winding up order on the basis that the debtor is unable to pay its debts as they fall due must prove to the court that the inability to pay is not caused by the current crisis.
Michelle Quinn is a Partner at Grosvenor Law specialising in commercial litigation and insolvency.
The contents of our blog posts do not constitute legal advice and are provided for general information purposes only