Corporate Insolvency and Governance Bill - the biggest corporate insolvency change in a generation

Donald McNaught

Donald McNaught

Restructuring Partner

Update - The Corporate Insolvency and Governance Act 2020 came into effect on 26 June 2020.

Those of us who have been working in insolvency since the nineties will remember the seismic change brought in by the Enterprise Act in 2003. Corporate insolvency had largely remained unchanged before then since 1986!

Roll forward 17 years and we welcome a new Bill which, per the Insolvency Service, is intended to “help companies to maximise their chances of survival, protect jobs and support the country’s economic recovery”.

Unlike 2003, it does not materially affect our existing regime but, helpfully, adds to the toolkit of insolvency practitioners. 

As a firm, we have always embraced the “horses for courses” approach - where a company cannot continue and needs an orderly wind down, a liquidation is likely to be appropriate.  At the other end of the spectrum, we are successfully working to implement three Company Voluntary Arrangements (CVAs) for the David Urquhart Group which were approved by creditors unanimously on 21 May 2020. We are implementing the process best suited to achieve the aims of all stakeholders.

We believe these protective tools will come to the fore in the current crisis and it is timely that our clients have successfully progressed these CVAs. At the same time, the Government is proposing to bring in a new ‘debtor in possession’ procedure which is exactly how we would describe a CVA. This was consulted on previously but the huge economic impact of COVID-19 has resulted in these proposed changes being revisited and accelerated through parliament.

Company moratorium

For company directors, you can expect to benefit from a 20 business-day moratorium that is easier to obtain than the current version and can be extended. This prevents legal action by any creditor, including secured creditors, allowing breathing space to come up with a viable plan. It also does not automatically mean that the company will enter administration, there is an opportunity to propose a CVA etc., once the moratorium is over.

The current Bill excludes LLPs but will be available to the large majority of businesses.

A company moratorium requires a Monitor, someone who must be an Insolvency Practitioner. It will be their role to make various statements about the eligibility of the company - one of which being that it will rescue the company as a going concern. This is subject to a temporary relief however, recognising that the COVID-19 crisis makes it impossible to predict.

New Restructuring Plan

The outcome of the moratoriums could include the new Restructuring Plan. This could potentially see Courts approving plans despite dissenting creditors. Similar to Schemes of Arrangement (governed by the Companies Act), this will see directors retain control of their companies while creditors, and then the Court, consider the proposal.

This may be a process suited to companies capable of dividing their creditors into different classes (where each class has similar rights) and where creditor objections are expected.

Temporary Suspension of wrongful trading

During this crisis (commencing retrospectively from 1 March and expiring on 30 June, or the later of that and one month after the Bill comes into effect), and to further protect companies and their directors, the Bill controversially proposes a temporary suspension of wrongful trading provision where a director can be found personally liable for certain debts of the company. This is not a mandate for misconduct however, with all other director obligations remaining in force. The intention is to free up directors to trade on without worrying about personal liability. Although, the reality is that wrongful trading actions are exceptionally rare and good judgement still needs to be applied with professional advice being sought.

Temporary restriction on winding up petitions

To extend this further, there will be a temporary restriction on winding up petitions where a debt is unpaid due to COVID-19 and is based on a statutory demand. 

Statutory demands issued between 1 March and 30 June cannot be used as a basis for liquidation petitions on or after 27 April. Furthermore, until 30 June, a creditor needs to demonstrate that a company’s inability to pay is not COVID-19 related. 

Ongoing supplies

The Bill also seeks to extend the obligation on suppliers to maintain supply to an insolvent business, currently only the case for utility services. This will be extended to other suppliers, who would otherwise rely on termination clauses in their contracts, when a customer becomes insolvent. Even where arrears exist, supply needs to continue.

A temporary exclusion until 30 June (or one month after the Bill comes into effect, whichever is later) exists for small suppliers.

Beyond these protective measures, the Bill also seeks to introduce measures to reduce the burden of AGMs and Companies House filing requirements.

The Bill* is not yet finalised, and changes are expected to be made before it comes into effect, however, the key structural changes above are likely to be in law by July - subject to the legislative timetable at Westminster.

An insolvency practitioner will be better placed than ever before to deploy tools to save companies in distress and our recent successes in using the CVA process shows that these will be supported by creditors, if presented in an open and transparent manner.

Contact us

If you'd like to discuss this further or find out how Johnston Carmichael can help, please do not hesitate to get in touch with me or a member of my team

Blog update - The Corporate Insolvency and Governance Act 2020 came into effect on 26 June 2020.