To ameliorate the unforeseen long-term effects of the COVID-19 pandemic on the economy, the government has made wide-ranging reforms to the UK’s insolvency legislative framework. James Robbins and Benjamin Hughes from Harrison Drury’s insolvency team outline the key changes.
The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26 June, 2020, but most of its temporary provisions take effect retrospectively from 1 March, 2020.
The Act is designed to reduce pressure on struggling businesses and assist them in surviving the economic downturn during the pandemic, by allowing businesses grace periods before insolvency proceedings can be commenced against them. It also allows for detailed restructuring and places restrictions on suppliers terminating contracts, so that a business may continue to trade and provide employment as a going concern.
Businesses which may be suffering from a decline in revenue will be positively affected by the measures implemented by the Act, and may wish to take note of the following key provisions:
Temporary measures for businesses in distress
The Act brings into force a number of temporary measures targeted towards businesses that are experiencing distress as a result of the short-term impact of the pandemic. These measures are intended to be strong enough to keep businesses trading through the pandemic, whilst balancing the interest of creditors.
Winding up Petitions and Statutory Demands: The Act includes temporary provisions to restrict the use of statutory demands and winding up petitions, particularly in circumstances where the debt falls due as a result of the pandemic. Petitions on the grounds of cashflow or balance sheet insolvency will not be available during the period from 1 March, 2020 to 30 September, 2020, if the failure of a company to settle its debts is a result of the ‘financial effect’ of the pandemic.
Similarly, no petition can be presented on the grounds that the company failed to satisfy a Statutory Demand if it was served during this period. As can be seen, these measures provide strong protection against proceedings for debts that have fallen due as a result of the pandemic.
Wrongful trading: The provisions in the Insolvency Act 1986 which allow office holders to bring actions against directors for wrongful trading have been significantly muted. Whilst there is no outright suspension on such proceedings, the courts will assume that the director is not responsible for any deterioration in the financial position of the company or the position of its creditors between 1 March and 30 September, 2020.
The Act also brings into force a number of permanent measures targeted towards the long-term recovery and stability of businesses and the UK economy. These measures are designed to assist businesses to remain solvent during the unforeseen long-term effects of the pandemic.
Moratorium: One of the most notable introductions of the Act, is an independent provision allowing most businesses to apply for a 20-day moratorium. During the moratorium, a company’s directors retain control of the business, but this is overseen by a Monitor, who is a qualified insolvency practitioner.
Whilst a business is in the moratorium, they will benefit from a ‘payment holiday’ from most pre-moratorium debts, apart from employee salary and contracts involving financial services. For a company to successfully apply for a moratorium, it must be likely that it will result in it being rescued as a going concern.
A moratorium can be extended for a further 20 days without creditor consent, and further extensions can be granted with the consent of creditors. This is similar to the existing administration moratorium, and balances the risk to creditors by allocating a ‘super priority’ to any debts that were not subject to a payment holiday during the moratorium, if a business becomes insolvent within 12 weeks of the end of the moratorium.
Protection of supply of goods and services contracts: Another notable permanent measure is that the rights of a supplier under any contract for goods and services are now restricted, as these contracts can no longer be terminated on the grounds that a business is subject to an insolvency procedure, such as the new moratorium or a company voluntary arrangement.
Suppliers are also prevented from relying on a termination clause if the grounds arose before a business was subject to an insolvency procedure, where they attempt to terminate the contract after an insolvency procedure begins.
Certain sectors such as insurance, financial and banking services are exempt from this. This provision is intended to ensure that a business is not deprived of the means they require to remain solvent purely on the grounds that they have become subject to an insolvency procedure.