Previously, on 28 April 2020, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy announced that the Government would be introducing a series of new measures to help protect businesses during the Coronavirus National Crisis.
On 20 May 2020, the Government formally unveiled its Corporate Insolvency and Governance Bill – the proposed piece of legislation to bring the Government’s measures into action. While some of the measures were anticipated, the Bill is the first true opportunity to see what the Government is proposing. We set out below an overview of the Bill:
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Company Moratorium
Insolvent Companies or Companies that are likely to become insolvent will be able to obtain a 20 business day moratorium to allow them time to restructure or seek new investment without fear of creditor action. The directors would need to make a statement that the Company is, or is likely to be, unable to pay its debts. A “Monitor”, who must be a licenced insolvency practitioner, must also make a statement confirming that the moratorium is likely to result in the rescue of the Company as a going concern.
The 20 day period can be extended for a further 20 days by the Directors filing a notice and specific other documents at Court. This can only be done in the last 5 days of the initial moratorium.
Any further extension beyond 40 days will need the consent of the Company’s creditors or the Court.
The Directors will remain in charge of running the Company and business on a day to day basis. The role of the Monitor will be to ensure that the Company complies with its requirements under the moratorium together with approving any new grant of security over Company assets and approving the sale of Company assets outside of the normal course of business.
Creditors will be able to challenge the actions of the Directors and Monitor on the grounds that their interests have been unfairly prejudiced.
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Restructuring Plan
A new restructuring procedure is to be introduced. While it is based on the existing scheme of arrangement process, where a Court approves the scheme between a Company, its shareholders and creditors – there will be the ability to cram down across classes of creditor. Creditors will vote on the plan in different classes (similar to those in schemes of arrangement). The plan will require 75% in value of each voting class to vote in favour. It will be for the Court to give final approval provided that it considers the plan to be just and equitable. The plan can also be approved by the Court where one or more class(es) of creditor (dissenting creditors) do not vote in favour.
Unlike a Company Voluntary Arrangement (“CVA”), the procedure will be able to bind both secured and unsecured creditors.
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Statutory Demands and Winding Up Petitions
Where the reason that a debt has not been paid is because of the Coronavirus, the following restrictions are proposed:
i. A petition cannot be presented by the Creditor during the period 27 April until 30 June or one month after the coming into force of the Bill (whichever is the later);
ii. If the Creditor has reasonable grounds to show that (a) the debtor has not suffered a “financial effect” because of the Coronavirus crisis; or (b) that the debtor would not have been able to pay its debts regardless of the “financial effect” of the Coronavirus; they can challenge for matters to go ahead;
iii. “Financial effect” appears to be relatively easy to satisfy, applying where the debtor’s financial position worsens as a result of, or for reasons relating to, the Coronavirus;
iv. Where a statutory demand has been served and remains unsatisfied during the period 1 March to 30 June 2020, no winding up petition can be presented as a result of this;
v. If a petition has been issued and is pending and is not caught by the other provisions, then the Court can make an order to sort matters out. It appears to be in the discretion of the Court;
vi. If a Winding up Order has already been made that would not have been allowed to proceed due to the provisions of the Bill, then it is void. It is unclear what this would mean in relation to costs and next steps to deal with rectifying the issues that the Order may have caused. -
Supplier Termination Clauses
Under the Bill, suppliers will not be able to stop supplies simply because of the Company’s insolvency, provided the Company continues to pay for the supplies. It will also prevent the Supplier amending its terms to force increased payments.
If the continued supply causes hardship to the Supplier’s business, then they can be relieved of their burden to continue. There is also a small company supplier’s exemption under the Bill during the Coronavirus crisis.
Most terms of business have clauses that allow supply to stop where there is insolvency, whether actual or implied. Such clauses will cease to have effect under the Bill’s proposals.
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Suspension of Wrongful Trading
The Bill seeks to temporarily suspend (retrospectively) the wrongful trading provisions of the Insolvency Act 1986 for a four month period from 1 March to 30 June 2020.
Wrongful trading is where Company Directors continue trading a Company where there is no reasonable prospect of the Company avoiding insolvency, thereby harming their creditors and customers. There is personal liability potentially for directors where wrongful trading has taken place.
The provisions aim to give some protection to Directors that have traded through the Coronavirus crisis with a view to their businesses continuing.
Administrators and Liquidators will not be able to bring wrongful trading claims for losses caused by trading during the suspension period.
It is worth noting that the Bill will not affect the duties that Directors owe to their creditors irrespective of the wrongful trading provisions. Administrators and Liquidators could therefore still bring claims under these breaches.
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Companies House filing requirements
The Companies Act 2006 sets prescribed deadlines by which specific information must be filed. A penalty is incurred where they are missed.During the Coronavirus extensions of time have been granted by Companies House. The Bill goes a little further allowing the Secretary of State to temporarily make further extensions to deadlines. However, the extension period must not exceed
i. 42 days where the existing period is 21 days or less;
ii. 12 months, where the existing period is 3, 6 or 9 months.
Conclusion
The Bill comes before parliament next on 3 June 2020. While, like other Coronvirus legislation, it is likely to be pushed through, it will be interesting to see what if any changes are made. We then have the House of Lords’ stage where there is likely to be proper discussion and debate about the sweeping changes that the Bill proposes. It is going to be interesting to see how many of the proposals of the Bill proceed unchanged.
We will keep you informed of developments, but if you would like to read the Bill yourself, the Government link is here (https://publications.parliament.uk/pa/bills/cbill/58-01/0128/20128.pdf). If you would like to discuss any aspects of the Bill, please do not hesitate to contact the writer, Graham Mead on 01473 298234 or another member of the Commercial Dispute Resolution team.
