Further to the announcement on 28 March 2020 that the government would make changes to insolvency legislation to assist struggling businesses and their directors during the pandemic, the government has now published its Corporate Insolvency and Governance Bill. The bill contains various temporary rule changes alongside substantial reforms to the UK insolvency framework, including the creation of an entirely new restructuring procedure.
Under section 214 Insolvency Act 1986, a director can be ordered to contribute to the company’s assets if they fail to take every step which a reasonably diligent person would take to minimise potential losses to creditors once they conclude (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration. The new bill however creates an assumption that a director is not responsible for any worsening of the financial position of the company, or its creditors, that occurs between 1 March and 1 June 2020 (or one month after the coming into force of the new Act, if later).
It is important to note however that this change does not amount to a blanket immunity for directors. No changes are made to the law relating to misfeasance or fraudulent trading, or to section 172(3) of the Companies Act 2006 which contains a similar duty requiring directors to consider and act in the interests of creditors.
The bill gives companies access to a four-week moratorium (extendable under various circumstances), during which no legal action can be taken against the company or its assets without leave of the court, while a rescue plan is considered. The moratorium is supervised by an insolvency practitioner, but the company remains under the control of its directors. This is likely to be an extremely helpful provision for companies as currently this protection is only available to those who either have a settled intention to appoint an Administrator, or who meet the restrictive criteria to be able to apply for a moratorium as part of a Company Voluntary Arrangement.
New restructuring procedure
The new procedure, referred to as a “Restructuring Plan”, is similar to a Scheme of Arrangement and will allow struggling companies to propose a compromise to their creditors and members. The procedure will be available to a company which has encountered, or is likely to encounter, financial difficulties that may affect its ability to carry on business as a going concern. It is intended to enable complex debt arrangements to be restructured and to support the injection of rescue finance into the business. It will also allow dissenting classes of creditors to be bound by the plan if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.
Termination clauses in supply contracts
The Bill introduces changes which will prevent suppliers from using the fact that a company has entered an insolvency procedure or obtained a moratorium to terminate supply contracts or vary their terms. However, the Bill also contains safeguards to ensure that suppliers can be relieved of their obligation to supply if it causes hardship to their business, and there is a temporary exemption for “small company” suppliers during the pandemic.
Statutory demands and winding up petitions
The Bill introduces temporary provisions to render any statutory demand served between 1 March and 30 June 2020 void, and to prevent any winding up petition based upon a debt being issued (whether based upon a statutory demand or not) unless the creditor can show reasonable grounds for believing either that coronavirus has not had a financial effect on the company, or the facts on which the petition is based would have arisen anyway. For petitions already presented before these provisions come into force, the court will have jurisdiction to make any order it thinks appropriate to restore the position to what it would have been if the petition had not been presented.
The Bill will now be debated in Parliament. If its progress is straightforward it is thought it could come onto the statute book at the beginning of July.
For further information please contact our Insolvency & Corporate Recovery Team.
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