New Corporate Governance and Insolvency Bill 2019-2021

In a recent article we reported that Business Secretary, Alok Sharma, announced plans on 28 March last to temporarily suspend wrongful trading provisions with retrospective effect from 1 March 2020.  A new Corporate Governance and Insolvency Bill (Bill) has been laid before Parliament to give effect to this plan by amending insolvency and company law to support businesses affected by the COVID-19 crisis.

Suspension of wrongful trading

The Bill affirms the previously announced measures to temporarily suspend wrongful trading laws between 1 March 2020 and 30 June 2020.  During this period, it will be presumed that directors are not responsible for any worsening of the financial position of a company or its creditors.  This will give some reassurance to directors who may be concerned that they could be held personally liable if a company becomes insolvent as a result of the crisis.  However, the Bill also affirms that all other directors’ duties remain firmly in place – so directors are not completely off the hook.

Statutory demands

To protect companies experiencing financial difficulties due to the COVID-19 crisis, the Bill introduces temporary provisions to void statutory demands being made on companies between 1 March 2020 and 30 June 2020.  It also prevents creditors from initiating winding up petitions between 27 April 2020 and 30 June 2020 unless they can demonstrate reasonable grounds for believing that (a) the coronavirus has not had a financial effect on the company or (b) the facts by reference to which the relevant ground for petition applies would have arisen even if coronavirus had not had a financial effect on the company.

Creditor Moratorium

A 20-business day moratorium is proposed under the Bill to give companies experiencing financial difficulties protection from creditors while financial rescue plans are put in place.  During that time, no creditor action can be taken against the company.  The protection period can be extended by a further 20 business days with creditor or court approval.

During the protection period, an insolvency practitioner will be appointed to monitor the process and ensure the company’s assets are protected.  The directors will, however, remain in charge of the day-to-day running of the business.

It should be noted that not all companies, such as financial service firms, are eligible to apply for a moratorium.

Termination Clauses

The Bill also includes a change to termination clauses in supply contracts.  Suppliers will no longer be able to rely on contractual terms to cease to supply or vary the contract terms of supply to companies who have entered into an insolvency or restructuring procedure or obtained a moratorium against creditors.  The insolvent company will be required to pay as normal for any supplies made to it whilst under court protection.  However, it will not be required to pay any other outstanding amounts due to the supplier until its rescue plan has been finalised or the moratorium comes to an end.  The Bill includes a safeguard whereby a court may grant permission for a supplier to terminate a contract if it is satisfied that the continuation of the contract would cause the supplier hardship.

Restructuring

Companies in difficulty can avail of a new restructuring plan option under the Bill which is designed to enable companies to be enter into a compromise or arrangement with its creditors or members to mitigate the effect of the financial difficulties and avoid liquidation.  Where 75% of the creditors by value or members by holding agree to the compromise, the courts can, where they consider the plan to be just and equitable, approve it which will allow for dissenting classes of creditors or members to be bound.  The plan includes the feature of being able to bind both secured creditors and unsecured creditors.

If you would like any further information on any of the matters described in this article, please contact Martin O’Donoghue  or Arthur Horsfall in our Corporate Department.

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.