The Corporate Insolvency and Governance Bill heralds the biggest changes to UK insolvency rules in 20 years. The outcome is to provide businesses more breathing space to trade during the coronavirus pandemic, but the Bill is also designed to bring about some more permanent changes following a review of the insolvency framework in the UK dating back nearly 5 years. Subject to any glitches it is expected the Bill will be fast tracked through Parliament and become law at the start of July 2020.
There are seven main areas to the bill:
Wrongful trading
The Bill makes a temporary change to the law of wrongful trading. Under the change a court is to assume that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs for the purposes of a claim the directors have wrongfully traded during this period.
The change will apply for a short period back-dated to 1 March 2020 and ending on either 30 June 2020 or one month after the provision comes into force, whichever is later. Depending on the duration of the emergency this period may be varied.
Whilst the change is not as wide as previously announced, to completely suspend the penalty, it should still give company directors greater confidence to carry on trading without the threat of personal liability should the company fail as a result of the coronavirus emergency.
To deter against deliberate misconduct, existing laws for fraudulent trading and director disqualification will continue to apply.
Termination clauses in supply contracts
The Bill makes a permanent change to the use of termination clauses in supply contracts. If a company enters an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, suppliers will be restricted from stopping supply or varying the supply terms (e.g. price hike), even if the contract permits. This is not a complete embargo. Whilst outstanding invoice amounts for historic supplies can be frozen, the company will need to pay for supplies once the insolvency process commences.
The measures will be countered to provide some protection for the interests of the small entity supplier. A small entity supplier is a supplier that meets any of the two conditions in the last financial year: Condition 1: the supplier’s turnover was not more than £10.2 million; Condition 2: the supplier’s balance sheet total was not more than £5.1 million; Condition 3: the number of the supplier’s employees was not more than 50.
Winding-up petitions
The Bill restricts a creditor from bringing a winding-up petition for an unsatisfied statutory demand in respect of a debt exceeding £750 during the period beginning on 27 April 2020 until either 30 June 2020 or one month after the coming into force of the Bill, whichever is later. However, there is an exception if a creditor can show it has reasonable grounds that (a) coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor.
The restriction has retrospective effect, so if a petition has already been presented during this period which if the law was in force at the time it would not have been successful, then a court will have discretion to reverse the position. In other words, some winding up petitions presented in the period may subsequently become void.
Company moratorium
A 20 business day moratorium period can be obtained to give viable businesses breathing space to seek new investment or funding, or time to restructure, where the company is or is likely to become unable to pay its debts. The moratorium will bind both unsecured creditors and secured creditors.
During this period the directors will remain in control of the business, but overseen by a licenced insolvency practitioner known as a “monitor”. The process can be started by the directors filing prescribed papers at court. The 'monitor' must confirm that the moratorium is likely to result in the rescue of the company as a going concern.
There will be scope to apply for a limited extension to the moratorium.
Restructuring plan
A new procedure will be introduced to restructure a company based on the existing “scheme of arrangement” procedure. It will enable a company to bind all creditors, secured and unsecured, even if they do not approve.
Companies House filing requirements
Under company law, the quid pro quo for members or shareholders of companies to have limited liability, is the disclosure of certain minimum information. Moreover, there are serious consequences if a company fails to make such disclosure. For example filing annual accounts and certain other documents within prescribed deadlines. The sanctions can be financial penalties, striking off the company and criminal liability on the directors.
Under the Bill the Secretary of State can temporarily make extensions to deadlines for filing annual accounts, annual confirmation statements and certain other filings. Companies House has already temporarily paused the strike off process to prevent companies from being dissolved. Companies House has also set up a 3 month extension for filing accounts.
Annual general meetings (AGMs) and general meetings (GMs)
Companies that are under legal duties to hold an AGM or other general meeting, will be able to meet by other means, even if this would be prohibited under the constitution. There will also be extensions to the time period to hold an AGM.
If you wish to discuss issues affecting your business then please speak with Spencer Laymond contactable at This email address is being protected from spambots. You need JavaScript enabled to view it. or on 0808 168 5588.
