Corporate Governance and Insolvency Bill
Guest article from Phil Deyes, Director, Leonard Curtis Business Solutions Group
On May 20, 2020, the UK Government published its much anticipated draft legislation (the Corporate Governance and Insolvency Bill) which aims to provide greater flexibility within the existing insolvency regime, giving extra support for businesses when they are struggling financially and giving them the maximum chance of survival.
The Government intends to ask Parliament to expedite progress of the Bill and make it law. There may be some changes to the Bill, but not that will change significantly the proposed amendments I will review below.
The Bill, which represents the biggest change to insolvency legislation in 20 years, introduces the following permanent and temporary amendments to the current regime:
- Permanent changes:
- a new ‘free standing’ moratorium on enforcement action;
- a new ‘restructuring plan’ process; and
- disapplication of supplier termination of contract provisions for insolvency.
- Temporary changes:
- a temporary suspension of wrongful trading; and
- changes to the Winding up Petition and Statutory Demand processes.
Key reforms in brief, include:
- A free standing moratorium of an initial 20 business days which may be extended, without creditor consent, for a further period of 20 business days, or up to one year with the consent of creditors or by the court. The moratorium is available to struggling businesses which are unable to pay their debts or likely to become unable to do so, but which are capable of being rescued. The directors will remain in charge of the business, overseen by an independent monitor, who must be a qualified Insolvency Practitioner. The moratorium is ‘free standing’ in that it does not have to be connected with a specific insolvency process, as is currently the case. The moratorium is very broad and will prohibit, among other things, legal proceedings and the enforcement of security by secured creditors.
- Contractual termination clauses in contracts will cease to have effect where a company enters an insolvency or restructuring procedure. There will be exemptions for certain companies but in the main, struggling businesses will be able to secure ongoing supplies of goods and services without fear of the supplier terminating that contract or suffer ‘ransom payments’ as historically been the case. This applies even of the supplier is owed monies by the company subject to the restructure plan. The new piece of legislation will apply to all insolvency processes.
- A new restructuring plan modelled on the existing Scheme of Arrangement that presently exists but is rarely used. The new plan provides greater flexibility to bind dissenting creditors, which was not previously possible and will increase the prospect of it being used more frequently as a restructuring tool.
- A temporary modification to the rules on director liability for wrongful trading. The aim is to provide more comfort to directors when making complex decisions about taking on more credit, when the future of a business is more uncertain given the current pandemic. When ultimately determining liability for wrongful trading (a personal claim against the director), the court will assume that the director was not responsible for losses incurred by the company and will not therefore make the director personally liable for specified debts of the company. However, directors’ will continue to owe general duties of care to the company and to act in good faith and not recklessly incur credit, to the detriment of creditors.
- A temporary prohibition on the service of statutory demands and making of winding up orders. Statutory demands against companies between 1 March 2020 and 30 June 2020 cannot be used as the basis of a winding up petition. Any creditor asking the court to make a winding-up order must show that the company’s inability to pay its debts was not caused by COVID-19. In essence, it will be very difficult for any creditor to issue winding up proceedings against a company during this prohibition period. This extends to all classes of creditor.
What do these changes mean for businesses?
The permanent changes are very welcome additions to help turnaround struggling companies, particularly as we face the prospect of a once in a generation recession. Used properly, they have the potential to save significant numbers of businesses and jobs that would otherwise be lost to preventable insolvencies. They provide Insolvency Practitioners with more statutory and legal support to turn a business around and provide more time to achieve this.
The temporary changes, suspending wrongful trading and limiting statutory demand and winding up petitions have provided a breathing space that many businesses have urgently needed. It has also given some comfort to company directors making difficult decisions at this time of crisis.