Partner Jeremy Laws discusses the recently published draft Corporate Insolvency and Governance Bill.
On 20 May 2020 the Government published the draft Corporate Insolvency and Governance Bill (‘the Bill’). It provides for some important changes to provisions contained in the Insolvency Act 1986 and the Companies Act 2006. The Bill is being 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 Bill 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.
The Bill is expected to be passed extremely quickly, with the Government’s plan being that the Bill will be given Royal Assent within a few weeks. Below, some important provisions contained within the Bill 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 Bill states that this period will be between 1 March 2020 and 30 June 2020. Therefore, the Bill is intended to have 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.
Once the Bill is approved by Parliament, a creditor will also be unable to issue a winding-up petition during the period 27 April 2020 to 30 June 2020 (or the date one month after the Bill has been enacted, whichever is the later), unless it has reasonable grounds for believing that:-
- COVID-19 has not had a financial effect on the debtor company; or
- 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.
Under the proposed Bill, 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 proposed Bill would not appear to affect the service of statutory demands on individuals (i.e. sole traders and traditional partnerships).
In addition, the draft Bill (in its current format) has no effect on putting an entity (a company, LLP or traditional partnership) into administration.
The Bill also provides that if a company is or is likely to become unable to pay its debts, then it can apply for a new form of moratorium. The ‘gateway’ moratorium would 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 would 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.
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.
The Bill proposes to effectively eliminate 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 Bill does not restrict the ability for a future claim to be made (against a director) for a breach of directors’ duties.
Companies, directors and creditors should all be mindful of the proposed legislation and its impact. The Bill reinforces guidance previously issued by the Government.
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