Corporate Insolvency and Governance Bill

On 20 May 2020, the Government published the long-awaited draft Corporate Insolvency and Governance Bill. For the full text of the Bill click here.

The Bill makes provision for companies and other entities facing financial difficulty and introduces, in addition to permanent reforms, certain temporary measures designed to mitigate the economic fall-out of COVID-19 and provide a degree of breathing space to entities and directors firefighting in the wake of unprecedented disruption to the economy. The Bill is expected to pass into law in late June or early July 2020. In summary, here is a roadmap:

1. Company moratorium

The Bill will introduce a new procedure for struggling companies to obtain a 20 business day ‘moratorium’ from creditor action to enable them to pursue a rescue plan. In order to benefit, the directors will need to make a statement that the company is, or is likely to become, unable to pay its debts. In addition, a licensed insolvency practitioner will need to be proposed as ‘Monitor’ and make a statement that it is likely that a moratorium for the company would result in the rescue of the company as a going concern. If the moratorium is granted, and while the moratorium will leave the directors in control, the Monitor will provide a degree of oversight for the duration of the moratorium and therefore protection for creditors. For example, the company will not be able to grant security over its property unless the Monitor consents. The moratorium can be extended for a further 20 business days at the initiation of the directors, with any further extension requiring creditor consent or Court permission.

2. Supplier termination clauses

The Bill will prohibit all suppliers from terminating the supply of goods or services by reason of a company’s insolvency and irrespective of any contractual right to do so, provided that the supplies continue to be paid for. Furthermore, suppliers will be prohibited from varying the relevant contract to make it a condition of continued supply that any outstanding charges are paid. However, suppliers will be able to apply to court to allow termination of supply on the grounds of hardship. In addition, the measures will not apply to small suppliers for an initial period until 30 September 2020.

3. Temporary suspension of directors’ wrongful trading liability

The Bill will suspend a director’s potential personal liability for wrongful trading under section 214 of the Insolvency Act in the period 1 March to 30 September 2020 (the Relevant Period) for all time. While this is an important protection for creditors in ‘peace’ time when there is no reasonable prospect of a company avoiding insolvency, the Government’s intention is clear: to remove the sword of Damocles in the form of potential personal liability hanging over directors’ heads and thereby help directors seeking to trade through and out of the crisis even if there is uncertainty over whether the company will be able to avoid insolvency in the future. While this will undoubtedly provide some relief to directors, it is a far cry from a ‘get out of jail free’ card. All other duties owed by directors will remain, both in terms of fiduciary duties (for example the duty to have regard to the interests of creditors when there is a risk of insolvency) and other statutory protections (for example in relation to fraudulent trading) and there has been no suggestion that any of these will be similarly suspended.

4. Temporary suspension of winding up petitions

While this will come as unwelcome news to creditors, for whom the threat of a winding up petition against the debtor company is often an effective tool to obtain swift payment of an undisputed debt, the Government is clearly concerned that if winding up petitions are not restrained for a period, mass insolvencies will follow. Therefore, in the Relevant Period, a creditor will not be able to present a winding up petition unless it can show it has reasonable grounds to believe that COVID-19 is not the reason for non-payment. Furthermore, and while there is some ambiguity in the drafting, any statutory demands served in the Relevant Period which remain unsatisfied are unlikely to be able to serve as the basis for a winding up petition even if a creditor has reasonable grounds to believe that COVID-19 is not the reason for non-payment.

For more information on anything contained in this article or to discuss what the changes may mean for your business, please contact: David Judah, Elizabeth Asher or Josephine Mathew.