Corporate Insolvency and Governance Act 2020
On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (“Act”) came into force. The primary function of the Act was to introduce permanent and temporary measures to assist companies with the financial difficulties they may have faced as a direct result of COVID-19. The headline changes are outlined below:
Moratorium – permanent:
Struggling companies are now provided with an opportunity to rescue or restructure the business by applying for a moratorium (provided there has been no moratorium in the previous 12 months). The Act provides a company with 20 business days to either secure third party funding or restructure. There is also an option to extend for a further 20 business days (without creditor consent), or up to one year (with creditor consent or as ruled by the court). During the application process, an insolvency practitioner will be appointed to “monitor” the moratorium. The monitor has power to bring the moratorium to an end including where he or she thinks that either a rescue of the company is unlikely or where a rescue has been achieved.
Disapplication of ‘ipso facto’ clauses – permanent:
The Act now expressly prohibits a third party supplier from terminating a contract with a company that is subject to an insolvency procedure (even where the contract provides for such termination). There are small number of exceptions – predominantly relating to the provision of financial services (banking and insurance). The supplier will be obligated to continue to supply the goods or services to the company throughout the insolvency procedure to provide the company with every opportunity to survive.
Restructuring plan – permanent:
Where a company has entered or is likely to enter financial difficulties, the Act now introduces a new restructuring mechanism where a company can propose a restructuring plan to its creditors or its members with a view to reducing, avoiding or mitigating the effect of the difficulties it faces.
Initially, the court is asked to convene meetings of the creditors (or classes of them) and the members (or classes of them) at which the restructuring plan is considered. Each class will vote on the restructuring plan and the plan is approved if 75% in value of those voting approve it. The court then decides whether to approve the restructuring plan. If one or more classes approve the plan, the court can bind dissenting classes provided a) the members of such dissenting class would not be any worse off under the plan than they would be under a relevant alternative (typically, liquidation) and b) the plan has been approved by 75% in value of a class of member or creditor who would receive payment (or have an interest in the event of a relevant alternative) under the plan.
Wrongful trading – temporary:
The Act temporarily suspends the pre-existing wrongful trading provisions between 1 March 2020 and 30 September 2020. However, the amendments only serve to mitigate but not eradicate the threat of personal liability arising from wrongful trading for directors who continue to trade a company between 1 March 2020 and 30 September 2020, not knowing whether the company will avoid insolvency in the future.
Although the Act does not suspend liability, it now directs the court to assume that where a director’s actions could constitute wrongful trading, the director was not responsible for any worsening of the financial position of the company or its creditors.
Whilst the Act mitigates the amount a director could be asked to contribute it stops short of ruling out a disqualification under the Company Directors Disqualification Act 1986. There is also no equivalent provision in respect of fraudulent trading or in the event of a misfeasance claim.
Statutory demands and winding-up petitions – temporary:
The Act now prohibits a creditor from serving a wind-up petition on the grounds of an unfulfilled statutory demand which was served between 27 April 2020 and 30 September 2020. Companies are not excused from winding-up orders where the financial difficulties were prevalent prior to or would have arisen in absence of COVID-19.
Company meetings – temporary:
Between 26 March 2020 and 30 September 2020, the Act adopts a more flexible approach to the formalities previously required to hold a legitimate company meeting. Where a company was required to have an annual general meeting during 26 March and 30 September 2020, the company will now be allowed to hold the annual general meeting at any time before the end of this period. In addition, quorum requirements may now be satisfied without any participants being physically present in the same place and meetings (and votes) may now take place electronically. The Act applies retrospectively to ratify those meetings that might have taken place on an electronic basis from 26 March 2020.
Company filing requirements – temporary:
The Act grants an extension to the filing of company accounts for public companies. Where a public company has a filing date between 26 March 2020 and 29 September 2020, the deadline will be extended to the earlier of 30 September 2020 and 12 months from the end of the company’s accounting period.
Additionally, the current 14 day deadline (commencing from the end of a company’s/partnership’s review period) will be extended to 42 days to file a confirmation statement.
This briefing note is not and is not intended to be professional legal advice. It merely sets out certain key points to bear in mind as you navigate these difficult and uncharted waters. The position in each case will turn on the facts and the terms of any contracts, and you should make sure that you seek specific advice in each case, from your usual contact at Clintons.