The Government has now published the Corporate Insolvency and Governance Bill (the “Bill”), which will make changes to existing insolvency laws in response to COVID-19 and enable companies undergoing a rescue or restructuring process to continue trading and help them avoid insolvency.
The provisions in the Bill will apply to all the creditors and companies, however, the provisions may be amended as the Bill is debated in parliament. A summary of its insolvency provisions, both temporary and permanent is below.
Restriction on statutory demands and winding-up petitions
The Corporate Insolvency and Governance Bill proposes that on presenting petitions in the period between 27 April 2020 and 30 June 2020 there may be a prohibition on issuing a statutory demand or presenting a winding-up petition in the following circumstances:
- If the creditor relies on non-payment in relation to a statutory demand served between 1 March 2020 and 30 June 2020;
- Where the petitioner relies upon the grounds in section 123(1)(a) to (e) of the Insolvency Act 1986, unless the petitioner has reasonable grounds for believing that COVID-19 has not had a financial effect on the company or the facts relied upon in founding the petition would have arisen regardless;
- If the petitioner relies on the ground that the company would not have been able to pay the debt as it fell due regardless of COVID-19.
All winding up petitions must contain a statement where the petitioner considers that the relevant the COVID 19 condition is met. Where applicable, if petitions are presented on or after 27 April 2020 before the force of this legislation and if the COVID-19 condition is not met, the Court may restore the position make an order that would have been made even if the petition had not been presented.
Director’s Liability and Wrongful Trading
The current wrongful trading rules have been of particular concern for directors of companies in recent weeks, as the impact of COVID-19 puts a strain on viable businesses everywhere, and the duration of the crisis remains uncertain.
The existing wrongful trading provisions are set out in the Insolvency Act 1986 and provide that a director can incur personal liability for a company’s debts if they fail to take every step that a “reasonably diligent person” would take to minimise potential losses of creditors once they knew or ought to have concluded (at some time before the commencement of those proceedings) that there was no reasonable prospect of the company avoiding liquidation or administration. This is known as wrongful trading, and results in civil liability. A defence is available if the director took “every step” with a view to minimising potential loss to the company’s creditors.
What is the Wrongful Trading Suspension?
The UK government has announced a temporary suspension to wrongful trading provisions to account for the exceptional circumstances posed by the COVID-19 pandemic. In the event that a director is found liable for wrongful trading, in considering what contribution (if any) the director should make to the company’s assets, the court will assume that the director was not responsible for any worsening of the company’s financial position between 1 March 2020 and one month after the coming into force of the Bill.
How will the Corporate Insolvency and Governance Bill help directors?
The suspension of the wrongful trading provisions will give directors the time and confidence they need to assess the needs of and future viability of their business in a clear-headed manner.
What is the 2018 Moratorium Proposal?
In addition to the wrongful trading suspension, the UK government recently announced that it will fast-track legislation to implement the insolvency reforms announced in August 2018. These proposals followed on from its 2016 and included:
- A new moratorium allowing solvent companies (that would otherwise risk becoming insolvent) a period of time in which creditors cannot are not able to take action against them. This will allow the companies time to commence restructuring or alternatively procure investment. The moratorium would be triggered by a court filing and have an initial 28-day life, capable of being extended by another 28 days (any extension beyond 56 days will require approval of majority of secured and unsecured creditors or the Court).
- A prohibition on suppliers exercising termination rights in contracts for the supply of goods and services on the grounds that a counterparty has entered a formal insolvency procedure, the new moratorium or a restructuring plan.
- A restructuring “plan” which will bind all dissenting classes of creditors.
How will the Corporate Insolvency and Governance Bill impact creditors?
These measures will likely have a significant impact on the position of creditors and their existing rights to seek repayment of overdue indebtedness.
If a company enters a formal insolvency process, the new pre-insolvency moratorium procedure outlined above prohibits termination of contracts on the grounds of enforcement of termination clauses in contracts which trigger upon the financial condition or formal insolvency of a debtor company. The counterparties will therefore have to continue to fulfil their contractual obligations.
It should be noted that this prohibition will not prevent termination for reasons of non-payment or the exercise of any other right to terminate that might exist under the relevant contract.
Perhaps inevitably, that balance is likely to favour debtor companies more than creditors and that is bound to be of concern to creditors whose businesses are in need of a cash injection.
Download the Corporate Insolvency and Governance Bill
When will the Bill apply?
The Corporate Insolvency and Governance Bill had its first reading in the House of Commons was on 20 May 2020 and a second reading is scheduled for 3 June 2020.
The new provisions will apply until 30 June 2020 or later to the date one month after the Bill becomes law as currently the second reading of the bill is timetabled for June 2020, however, the provisions are likely to be extended.
On going petition? Need Legal Advice?
If your company is concerned about a winding-up petition or statutory demand from a creditor your company can potentially challenge that petition.
As a leading law firm with a track record of success, you can be assured that your matter is in safe hands. Our success rate is a result of the dedication of our lawyers who will diligently review your matter so it has the best possible chance of success from the outset when it matters the most.
Specialist London Winding-up Petition Lawyers
We’re masters of insolvency dispute litigation. We are a specialist City of London law firm made up of Solicitors & Barristers. We’re based in the Middle Temple Inns of Court (next to the Royal Courts of Justice where the High Court and Central London County Courts are based). We’re experts in dealing with matters surrounding insolvency in particular our team have unparalleled experience at both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules. We provide a quick no cost initial telephone case review to establish whether or not we can help you; just call one of our team on 02071830529.
Want legal advice on the merits of your case?
Our simple enquiry form goes immediately to our insolvency team in Middle Temple, London. Call us on +442071830529 from 9am-6pm.