The draft Corporate Insolvency and Governance Bill is proceeding through Parliament and has now moved from the House of Commons to the House of Lords.

The bill contains a number of provisions which are set out in outline below and which have significant impact.

Wrongful Trading

Wrongful trading is an offence under the Insolvency Act 1986 where a director continues to trade a business in the knowledge that it is insolvent or cannot reasonably avoid insolvent liquidation

The Bill introduces a temporary suspension of directors liability for wrongful trading.

The provisions have retrospective effect from 1 March to 30 June 2020 or one month after the Bill is enacted (whichever is the later) and are extendable.

The new Bill says that, in assessing the contribution of a potentially defaulting director, the Court must assume that the director is not responsible for any worsening of the company’s financial position (or that of its creditors) during the period of 1 March until one month after the Bill is enacted and that period must be excluded from any calculation. The new Bill does not apply to all companies. For example, it does not apply to insurance companies, banks and other financial institutions.

The purpose of the provision is to help directors trade the company through the current coronavirus crisis by removing the threat of personal liability for potential wrongful trading.

It is worth noting however that the Government has made clear that all other director duties under the Companies Act 2006 and Insolvency Act 1986 remain in place meaning that directors may still be found liable of offences that arise during this period, even if they are not directly related to wrongful trading.

Supply contracts

These are known as “ipso facto” clauses, which are very common in supply contracts and provide that the supplier of goods for services has an ability to terminate the contract (or sometimes provide that the contract terminates automatically) if the company goes into an insolvency procedure.

The new Bill introduces a new section into the Insolvency Act 1986 providing that, where a company goes into an insolvency procedure any such clause ceases to be enforceable, including any clauses in the contract providing that “any other thing could take place” for example, an increase in prices.

Further, where the supplier is entitled to terminate the contract or do “any other thing” because of an event that occurred before the start of the insolvency procedure then that entitlement which arose before the start of the period of entitlement cannot be exercised during the insolvency procedure.

There are exceptions to these provisions where:-

1. the company or office holder consents to termination; or
2. the Court is satisfied that the continuation of the contract would cause the supplier financial distress (particularly small-scale suppliers) and grants permission for termination.

New Restructuring Scheme

The Bill introduces a new restructuring tool (“Restructuring Plan”) in addition to those already available e.g. Schemes of Arrangement, CVAs or Administrations.

Companies or their creditors can propose a compromise or arrangement between the company and its creditors and/or shareholders.

The new Restructuring Plan includes provisions that, subject to certain provisos, allow one assenting class of creditor to bind a dissenting class of creditor provided the dissenting class of creditor is not prejudiced.

The new scheme must be sanctioned by the High Court.

Any company, which is liable to be wound up under the Insolvency Act, including a foreign company, can be subject to the new scheme.

Moratorium

When enacted, the Bill will introduce an additional corporate insolvency procedure into the Insolvency Act 1986. The new procedure will simply be called “the Moratorium”.

It will allow a company to enter into a freestanding legal process that protects the company from any creditor action whilst giving it breathing space to formulate and/or implement a plan as to how it might secure its recovery as a going concern.

The new procedure allows the directors of the company to largely retain control of its affairs, applying the concept of a debtor in possession regime.

Subject to the applicable criteria, the Moratorium can be started out of court by the directors themselves or in court if the company is subject to a winding up petition or if it is a foreign company. The Moratorium can be lifted by the court.

The Moratorium must be supported by a statement from a licensed insolvency practitioner stating that the business can be rescued as a going concern. Legally, this suggests that achieving a rescue is more certain than not and is a high threshold to achieve. This wording is currently subject to Parliamentary debate and may be lowered before the Bill comes into law.

The Moratorium is supervised by the insolvency practitioner who gives the above statement (known as the Monitor). The Monitor must review the Moratorium and report to the court if rescue stops being an achievable outcome. This would terminate the Moratorium.

The Moratorium lasts for an initial 20 days and it may be extended by agreement with the creditors or by the court.

Once in a Moratorium a company has the benefit of a Payment Holiday from its existing creditors but it must pay any creditors who it obtains goods or services from during the Moratorium. Failure to pay a Moratorium creditor is grounds for termination of the Moratorium.

Statutory Demands/Winding up Petitions

There are new temporary restrictions on the ability to serve statutory demands and/or winding up petitions between 1 March 2020 and 30 June 2020 (or one month following commencement of the provisions in the Bill). This is to protect businesses suffering from the financial effects of COVID-19 during this period.

These restrictions apply to all creditors and all debtor companies after 27 April 2020.

Between the 27 April 2020 and one month after commencement of the restrictions creditors may not present a petition without first stating in the Statutory Demand/Winding up Petition that they have “reasonable grounds for believing” that the company would have been deemed insolvent even if the current crisis hadn’t had a financial effect.

This is a high test to satisfy as it is widely expected that the courts will take the view that most individuals and businesses will have suffered some detrimental financial effect during the COVID-19 pandemic. The onus now falls on the creditor to prove that this assumption does not apply.

Petitions already presented or winding up orders already made between 27 April 2020 and the coming into force of the relevant restrictions may be subject to being undone/unwound unless they would have fulfilled the above threshold.

A company subject to a winding up petition presented between 27 April 2020 and one month after the restriction has come into force will not have to apply for any validation orders under Section 127 of the Insolvency Act 1986. This, again is to save time and costs for companies and it also provides some legal protection for those dealing with these companies.

UPDATE: As from 26th June, this Bill received the Royal Assent and so is now law.

The provisions are potentially wide-ranging and complex. If you require further assistance then please do not hesitate to contact our specialist corporate recovery and insolvency team by calling 01482 325242 or email: enquiries@andrewjackson.co.uk