On 25 June 2020 the Corporate Insolvency and Governance Act received royal assent and came into immediate force. The Act introduces temporary changes which the Government has advised seek to ‘relieve the burden on business during the coronavirus outbreak.’ It also introduces permanent reforms to English insolvency and restructuring law.
Temporary changes:
- Easements for Annual General Meetings (AGMs) and filing requirements for public limited companies;
- Restrictions on the use of statutory demands and winding up petitions; and
- Relief from liability for wrongful trading.
These temporary reliefs will remain in place until 30 September 2020.
Permanent changes:
- A new moratorium period on legal action;
- Termination clauses in supplier contracts will cease to apply on insolvency; and
- New restructuring plans.
We will summarise some of the key changes below.
Moratorium on legal action
The moratorium is an extendable 20 day prohibition on creditors taking legal action against a company. For example, during this period a creditor will not be able to present a winding up petition or attempt to enforce security over any asset of the company.
To obtain a moratorium an eligible company should apply to the court by filing the required documents. These include a statement from the directors that the company is or is likely to become unable to pay its debts and a statement from the ‘proposed monitor’ that the company is eligible. During the moratorium period what the company can do its restricted.
There are various exceptions to eligibility set out in the Act. For example, investment banks and firms are excluded, and companies that were subject to an insolvency procedure in the 12 months preceding the date of filing the moratorium.
New restructuring plan
A new insolvency process has been introduced, based on the existing procedure for Schemes of Arrangement. A key change is the court can now bind dissenting classes of creditors to the plan. The plan must be approved by 75% in value of creditors of one class affected.
Restrictions on the use of statutory demands and winding up petitions
The Act has introduced a temporary suspension on the use of statutory demands as a basis for a winding up petition if a company can show that their insolvency is due to debts caused by coronavirus. The suspension gives companies temporary relief from the threat of being wound up, and will be particularly important to businesses in those sectors hit the hardest by the pandemic such as hospitality and retail.
The effect of the suspension is that a creditor cannot present a winding up petition for a registered company’s failure to satisfy a statutory demand on or after 27 April 2020 if the demand was served between 1 March and 30 September 2020.
This only applies to companies affected by coronavirus. If the company would have been unable to pay its debts regardless of coronavirus, the company may not be able to benefit from this suspension. The burden to prove that coronavirus did not have financial effect on the company lies with the creditor.
Summary
The Act brings both long and short term relief to companies affected by the coronavirus pandemic.
Our corporate solicitors are experienced in advising creditors how to minimise their risk, whether this is by ensuring their contracts are watertight, or assisting with the repayment of debt before a company becomes insolvent.
For advice on how to protect your business in light of these changes, please contact Richard Coulthard on 0113 284 5000 or alternatively email Richard.Coulthard@isonharrison.co.uk
