It may have been a long time coming, but the UK government yesterday introduced to parliament the lengthy Corporate Insolvency and Governance Bill (the Bill), which aims to implement some of the most significant changes to insolvency legislation since the implementation of the Insolvency (England and Wales) Rules in 2016. The Business Secretary, Alok Sharma, first announced that there would be changes to current insolvency legislation almost two months ago and since then the proposals have generated much discussion in the industry. With the Covid-19 pandemic continuing to pose significant challenges to businesses, the Bill has finally been pushed through. We expect, in the coming days, the Bill will be debated in parliament.
Edwin Coe’s Insolvency & Restructuring team summarise some of the key points to note from the Bill:
Suspension of liability of wrongful trading
Section 10 of the Bill provides that in “determining for the purposes of section 214 or 246ZB of the Insolvency Act 1986 (liability of director for wrongful trading) the contribution (if any) to a company’s assets that it is proper for a person to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the Relevant Period”.
The wording of the Bill, on an initial reading, appears to do what the government proposed: a temporary period of protection for company directors, whilst they do their best to trade a struggling company through the early stages of the Covid-19 pandemic. The realistic effect of the legislation however is debatable.
The Relevant Period, for which the provision is applicable, spans 1 March to 30 June 2020 and will see directors absolved of responsibility for any worsening of the financial position of a company or its creditors during this period. As to what approach should be adopted in respect to directors’ actions either side of the Relevant Period has been omitted from the Bill and will, no doubt, leave directors nervously navigating their way through the uncertain twilight period of a company’s existence during equally challenging stages of the pandemic. And, of course, the Bill fails to provide a shield from any of the numerous other claims that could be brought against a director, such as breach of duties (discussed here) and misfeasance.
For directors, this legislation is unlikely to bring much relief. For advisors, there are a number of holes and uncertainties. And for insolvency practitioners, they will be left waiting for and dreading the impending complications that this provision will bring to an already difficult area.
In a verbose piece of draft legislation, which proposes significant changes, the wrongful trading provision appears to be the exception. It fails to properly protect innocent and well advised directors, just as it fails to sift out those directors who should indeed be culpable for wrongful trading claims throughout the pandemic. At this stage, it appears unnecessary at best, and unhelpful at worst.
Prohibition of winding-up petitions
Part 1 of Schedule 10 prevents the presentation of a petition for the winding up of a registered company by a creditor, on the grounds of the company’s inability to pay debts, on or after 27 April, where the statutory demand was made in the period from 1 March to 30 June 2020. Part 2 of the Schedule, prohibits creditors presenting winding-up petitions from 27 April to 30 June 2020.
The noteworthy caveat to the prohibition is included in Part 2, which excludes circumstances in which the creditor has reasonable grounds for believing that Covid-19 has not had a financial effect on the company or, indeed, that the facts would have arisen in any case were it not for the Covid-19 pandemic. Further, the temporary prohibition does not prevent the presentation of winding-up petitions by the directors, or by the Secretary of State on public interest grounds.
The Bill further provides that where a petition presented during the Relevant Period has resulted in a winding-up order being made, which would not have been made had the provisions of the Bill been in force, the court may make such order as it thinks appropriate to restore the position to what it would have been had the petition not been presented.
Also of note, where a winding-up order is made by the court (as permitted by the new provision), the commencement of the winding up will be from the date of the winding-up order, rather than the date that the petition was filed. The consequence? Dispositions of company assets made after presentation of the petition up to commencement of the winding up order will not be deemed void.
Significantly, and contrary to High Court judgments delivered since Mr Sharma’s first announcement (discussed here), the prohibition extends to all registered companies in respect of all debts. The expectation that this prohibition would be reserved for rent arrears in the hospitality, leisure and retail sectors has been turned on its head. The effect? Creditors’ will be hamstrung with limited options of recourse against bad debtors; and, in a spiral of depression, such creditors may subsequently find themselves in financial difficulty and unable to pay their creditors. The government is clearly out to protect businesses but it remains to be seen how this can be achieved without passing financial difficulties along the chain.
The Bill introduces a 20-day moratorium for eligible companies, which period can be extended by the directors, by court order or creditor consent. The definition of an “eligible company” is broad: it is essentially any company that is not “excluded”, and the list of exclusions includes those that are or have in the last 12 months been in an insolvency procedure, insurance companies, banks, and certain other types of finance companies.
During the moratorium a licenced insolvency practitioner (IP) will act as Monitor, whose main purpose is to “monitor the company’s affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern”. Depending on what the Monitor concludes, they can bring the moratorium to an end if they consider it will no longer serve this purpose.
The proposed moratorium will restrict most legal processes, including administration appointments, as well as various enforcement procedures. However it does not restrict directors from making administration applications or presenting winding-up petitions. Additionally a company may be voluntarily wound up if the directors so recommend. The aim of this is very much to protect the company from creditor action.
The moratorium restricts the company from entering into a number of transactions, including obtaining credit for more than £500 without informing the lender of the moratorium, and granting security without the Monitor’s consent.
The Bill also creates a number of criminal offences aimed at directors, which cover the making of false representations to obtain a moratorium, and committing, or being privy to, a fraudulent act in relation to the company’s property at any time in the year prior to the commencement of the moratorium. Therefore there will be penalties if the moratorium regime is abused.
Protection of supplies of goods and services
The Bill also builds on the current rules found in s.233A preventing “essential suppliers” (e.g. utilities, communication providers, computer hardware and software etc.) from terminating contracts upon the company becoming subject to an insolvency procedure. The Bill seeks to expand this to cover all suppliers of goods and services (save for certain “small entities”). It also prevents suppliers from making it a condition that pre-insolvency debts are paid in return for continuing to supply their goods or services. If the Bill is approved as drafted, going forward suppliers will only be able to terminate contracts if the office holder/company consents or the court orders. In the case of the latter it will be up to the supplier to show that continuing with the contract would cause the supplier “hardship”. It will be interesting to see how this provision (if enacted) is developed by the Courts.
Easing of regulatory requirements
Rules relating to regulatory requirements for companies have also been temporarily eased; the Bill allows annual general meetings (AGMs) to be held online without any number of those participating being together in the same place. Alternatively, the Bill provides that companies will have the option to delay their AGMs until late September 2020. There are also provisions which permit extensions for making filings at Companies House such as notices of a change in registered office address or notices of changes in directors.
The Edwin Coe Corporate & Commercial Department will be providing updates on this in due course.
New restructuring tool
The Bill sees the introduction of new restructuring provisions for companies to comply with if they are facing financial difficulties. A “compromise or arrangement” can be proposed by the company and its creditors or members. The purpose of any such “compromise or arrangement” would be to mitigate the effect of the financial difficulties of that company.
The “compromise or arrangement” will be sanctioned by the court, even if there is a small group of dissenting creditors who vote against it. The court will be permitted to sanction a “compromise or arrangement” on the basis that the dissenting creditors will be no worse off than they would be in the event of a relevant alternative.
If you have any queries about any of the issues discussed in this update, please contact Sophia Bompas, David Fendt, Claire Sansome, or any member of the Restructuring & Insolvency team.