Partner Jeremy Laws discusses the Corporate Insolvency and Governance Act 2020.
On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (the ‘Act’) gained Royal Assent. It provides for some important changes to provisions contained in the Insolvency Act 1986 and the Companies Act 2006. The Act has been pushed through as a matter of urgency in light of COVID-19, with a view to giving companies and LLPs the best possible chances of getting through the crisis. The Act also forms part of the Government’s plan to limit job losses and assist in kick-starting the economy out of the recession caused by the COVID-19 pandemic.
Below, some important provisions contained within the Act which affect companies, directors and creditors, are considered in more detail.
Statutory Demands and Winding-up Petitions
Temporary measures restrict the way in which a creditor can use a statutory demand or bring a winding-up petition against a debtor company where a debt remains due.
A creditor’s ability to rely on a statutory demand (as evidence) in any winding-up petition is effectively prohibited during the ‘relevant period’. The Act states that this period will be between 1 March 2020 and 30 September 2020 (previously it had been proposed that the period would end on 30 June 2020). Therefore, the Act has retrospective effect with the provision to be regarded as having come into force on 27 April 2020. This provision is likely to mean that statutory demands served during the relevant period will be meaningless.
Under the Act a creditor will also be unable to issue a winding-up petition during the period 27 April 2020 to 30 September 2020, unless it has reasonable grounds for believing that:-
(a) COVID-19 has not had a financial effect on the debtor company; or
(b) the ground upon which a petition has been made (under the Insolvency Act 1986) would apply even if COVID-19 had not had a ‘financial effect’ on the debtor company.
The Act provides an option for these temporary measures to be further extended for periods of six months. Any extension(s) will need to be approved by the Secretary of State and be considered reasonable to alleviate the effects of COVID-19.
Within the Act, COVID-19 is deemed to have a ‘financial effect’ on a company if its financial position worsens in consequence of, or for reasons relating to, COVID-19. This would appear to be a very low test (for a company to meet) and therefore creditors should carefully consider whether it is viable to present a petition during this period.
This temporary measure applies to all winding-up petitions and so goes further than the Government’s previous position, which was that a moratorium was to be placed on petitions issued by a landlord in a property context.
Importantly, it should be noted that the Act does not appear to affect the service of statutory demands on individuals (i.e. sole traders and traditional partnerships).
In addition, the Act does not appear to have any effect on putting an entity (a company, LLP or traditional partnership) into administration.
The Act also provides that if a company, limited liability partnership or registered society is, or is likely to become unable to pay its debts, then it can apply for a new form of moratorium. The ‘gateway’ moratorium will freeze action on existing debts and will allow the company’s directors to engage with an insolvency practitioner to see whether the company can be saved. The purpose of this measure is to give companies the opportunity to continue trading, provided they can show that the moratorium should help rescue the company as a going concern.
The initial moratorium will be for 20 business days, but there is the option for this to be extended by a further 20 business days (by the directors) or by up to a year with the prior consent of its creditors or the permission of the court.
In an amendment to the draft bill that was tabled in May 2020, the Act now also removes a lender’s ability to secure what was considered as a ‘super-priority position’ for their debt should insolvency proceedings follow any moratorium period, by effectively accelerating debts due throughout the moratorium.
Under current insolvency legislation, where a company continues to trade beyond the point at which it is clear that it will not escape insolvency proceedings (and the debts owed to creditors increase), a director can be held to be personally liable to creditors.
However, the Act effectively eliminates this threat of personal liability from directors, as a way of incentivising companies to continue to do business through periods of concern caused by COVID-19. Importantly however, directors should note that this temporary measure does not detract from their overriding obligations (both to the company and to its creditors). Consequently, the Act does not restrict the ability for a future claim to be made (against a director) for a breach of directors’ duties.
The Act provides that this temporary lifting of personal liability from directors will run from 1 March 2020 to 30 September 2020.
It is important that companies, directors and creditors consider the Act and its impact as we come out of lockdown.