Corporate Insolvency and Governance Act 2020 - a more supportive approach to business rescue

The Corporate Insolvency and Governance Act 2020 (the Act) which came into force on 26 June 2020 has introduced a range of new measures designed to help struggling but viable companies overcome their financial difficulties.

The Act was rushed through Parliament to help businesses address the immediate threat of the Coronavirus/Covid-19 pandemic. However, its long-term aim is to create a more supportive and constructive approach to insolvency and restructuring in the UK akin to the rescue-focused culture of the US. Prior to the Act, critics accused UK insolvency law of being too creditor-centric; that it was too easy for a creditor to take action and force companies into insolvency when recovery was possible.

The Act includes a range of permanent measures as well as temporary measures intended to prevent unnecessary insolvencies during Covid-19 pandemic and subsequent lockdown. These measures include stays on creditor action and a new restructuring process that companies can implement even if they cannot get 100% agreement from their creditors.

Permanent measures

Breathing space moratoriums

The directors of a company can now apply for a 20-business day moratorium during which its creditors will not be allowed to take legal action. Any existing claims will also be paused. The purpose of the moratorium is to give the company breathing space to allow it to explore rescue action. However, it is only appropriate for companies that have a realistic prospect of recovery outside of administration or a Company Voluntary Arrangement.

Restructuring plans

The Act introduces new provisions for companies and their creditors to form a restructuring plan. If the plan is approved by at least 75% of each class of creditors or it receives court sanction, all creditors – even those who who vote against it – will be bound. These provisions will give companies more flexibility to restructure even if it cannot obtain the approval of all its creditors.

Termination of supplier contracts

The Act now prohibits suppliers from terminating a contract with a company which has entered into or intends to enter into a formal restructuring or insolvency procedure.

A supplier could still terminate a contract if the company agrees to the termination or if it can prove in court that the contract would cause the supplier hardship. However, it is not yet clear what ‘hardship’ means.

Additionally, if the terms of the contract allow, a supplier could still terminate it on grounds other than insolvency. Companies should therefore be aware that suppliers may become more creative with their termination clauses in future and should always seek legal advice about the terms of a contract before agreeing to them.

Temporary measures

Ban on Statutory Demands and Winding Up Petitions

Creditors will be unable to serve Winding Up Petitions on a Statutory Demand served between 27 April and 30 September 2020. The only exception is if they have reasonable grounds to believe that:

• The business has not been financially impacted by Covid-19; or
• The business would be insolvent even if it had not been financially impacted by Covid-19.

Wrongful trading suspended

Wrongful trading allows a director of a limited company to be held personally liable if they continue to trade where they knew or ought to have known that there was ‘no reasonable prospect of avoiding insolvent liquidation’ and they did not take steps to minimise the creditors’ loss.

The Act has temporarily suspended personal liability for wrongful trading from 1 March 2020 to 30 September 2020. This means that directors can continue to trade during this period without the risk of legal action.

Although a company that is truly beyond saving is unlikely to be saved by the suspension of wrongful trading, these temporary provisions are likely to give directors of viable companies more confidence to get the company through the Covid-19 crisis. However, other directors’ duties will continue to apply, including the provisions on fraudulent trading and duties to act in the best interests of the company.

Do you need advice about insolvency, restructuring or debt recovery?

At Atkins Hope, we can offer you practical business rescue, recovery and insolvency advice designed to secure the best possible outcome for your business. Combining extensive legal knowledge with years of practical experience and commercial insight, we will help you explore a wide range of options to find the best way forward for you.

For expert advice, get in touch with our insolvency solicitors by giving us a call at your local branch in Croydon, Medway, Blackheath or Guildford or fill in our online enquiry form for a quick response.