Corporate Insolvency and Governance Act 2020: further support for businesses in the wake of Covid-19 and beyond

Corporate Insolvency and Governance Act 2020: further support for businesses in the wake of Covid-19 and beyond

On 25 June 2020, the Corporate Insolvency and Governance Bill received royal assent and became law on 26 June 2020 (the “Act”).

The legislation has been fast tracked through Parliament and contains several temporary measures intended to relieve the burden on businesses across the UK in the wake of the COVID-19 pandemic, so that business efforts may be focussed on continuing to operate.

In addition, the Act contains various permanent aspects intended to give companies breathing space while an assessment of the viability of a rescue is considered. Such measures have in fact been in the pipeline since 2018. 

Temporary changes

Suspension of wrongful trading liability:

Under current insolvency laws, once a company’s directors conclude (or should have concluded) that there is no reasonable prospect of the company avoiding liquidation/administration they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors. If, after the company has gone into liquidation/administration, it appears to the court that a director has failed to comply with this duty, the court can order the director to make such a contribution to the company’s assets as it thinks proper. This is known as ‘wrongful trading’.

The Act introduces temporary changes to the application of wrongful trading, effectively suspending the offence so that the court will be able to assume that the director is not responsible for any worsening of the financial position of the company or its creditors between 1 March and 30 September 2020. There is no requirement to show that the deterioration of the company’s financial position was due to the COVID-19 pandemic. Nevertheless, it should be noted that existing laws for fraudulent trading, directors’ duties to the company and director disqualification remain in place.

Restrictions on winding up petitions:

Broadly, where a statutory demand has been properly served in the period 1 March 2020 to 30 September 2020 (relating to a demand for payment of a sum exceeding £750), a winding up petition cannot be presented by a creditor from 27 April 2020.

Virtual general meetings permitted:

In the period 26 March to 30 September 2020, the Act permits general meetings of shareholders to be held “by electronic means or any other means”. This is not subject to the provisions of a company’s articles of association.

Extensions to Companies House filing:

Secondary legislation came into force on 27 June 2020, relieving companies of certain filing obligations relating to accounts, the annual confirmation statement, event-driven filings (e.g. changes to company directors) and mortgage charges. The government has published helpful guidance accessible here

Permanent changes

Company moratorium and new reconstruction plan introduced:

The Act introduces a new moratorium that will give a company in financial distress a 20-business-day breathing space from creditor enforcement action, which can be extended. The moratorium is overseen by a ‘monitor’ who must be a licensed insolvency practitioner. The monitor has a number of statutory roles, including a duty to bring the moratorium to an end if a rescue of the company is no longer likely or the company is not paying those debts that it needs to pay within the process.

The Act also introduces new “arrangements and reconstructions for companies in financial difficulty” where companies are able to propose an arrangement or compromise with creditors.

Suppliers beware:

Broadly, where a company enters an insolvency procedure a supplier will no longer be able to rely on contractual terms, allowing it to stop supply to, or threaten to stop supplying, that customer. However, in the period 26 June to 30 September 2020, small suppliers are temporarily excluded from this. Broadly, a “small entity” means that two of the following are satisfied:

  1. The supplier’s turnover was not more than £10.2 million.
  2. The supplier’s balance sheet total was not more than £5.1 million.
  3. The number of the supplier’s employees was not more than 50.

How can Blaser Mills Law help you and your business? For legal advice and assistance with all aspects of your business’ lifecycle please get in touch with the Corporate and Commercial team on 020 3814 2020 or contact Simon Stone at ses@blasermills.co.uk