The new Corporate Insolvency and Governance Bill had its second reading in Parliament on Wednesday 3rd June and should come into force very soon, the Government having squeezed the approval process - which would normally take over a year - into just six weeks!
It means companies outside the financial services sector which need to go through a rescue or restructure process will be able to continue trading, giving a much needed breathing space to increase chances of survival.
The Bill introduces some permanent and some temporary measures – the temporary ones will cover the period from 1 March until 30 June or one month after the Bill comes into force (known as the “Relevant Period”).
The key measures and how they could help you are discussed below.
1. Temporary: Wrongful trading
To give directors confidence to continue trading, there will be a temporary suspension of the wrongful trading regime, meaning a director will be assumed by the court to not be responsible for worsening the financial position of his company or its creditors during the Relevant Period.
However directors will still be required to comply with general duties – for example to act in the interests of creditors when the company is in the precinct of insolvency – and other company and insolvency laws such as those relating to fraudulent trading will still apply. The wrongful trading suspension will not prevent an administrator or liquidator bringing a claim against a director for breach of duty – so BEWARE!
2. Temporary: Winding up petitions
Statutory demands and winding up petitions are critical avenues for creditors seeking redress.
However from 27 April, statutory demands served during the Relevant Period cannot be used as a basis for winding up, and the remedy of winding up for cash flow or balance sheet insolvency will only be available where it can be demonstrated that the company would have been insolvent regardless of COVID-19.
Any winding up orders made between 27 April and the Bill coming into force will be void, unless a creditor can establish coronavirus has not had a financial effect on the company; or the ground for petitioning would apply regardless of coronavirus. The exceptions will be difficult to prove, and the resultant wrangling is likely to create delays and increase costs.
If a winding up order is determined void, the company will be restored to the position it was in pre-petition.
3. Permanent: Protection of supplies
Suppliers will be prevented, in certain circumstances, from exercising contractual rights to halt supplies due to a customer’s insolvency - and terms to that effect will be invalid.
Suppliers must fulfil formal contractual commitments irrespective of customers’ insolvency, thus allowing businesses to trade through any restructuring process and maintain stability of operations. Customers must still pay for goods and services, but outstanding amounts for past supplies will not be payable whilst rescue plans are implemented. If a customer enters a qualifying insolvency process (including the moratorium, plan, CVAs, administration and liquidation), its supplier cannot:
- terminate or do any other thing (for example change terms) as a result of the commencement of the insolvency process, or pre-commencement events; or
- impose ransoms by demanding payment of outstanding amounts as a condition of continuing supply.
The scope of the restrictions is broad, but the prohibition generally only crystallises once the company is subject to an insolvency process.
So suppliers - review your contracts early, to ensure they allow you to terminate on early signs of distress other than insolvency, principally late payment!
4. Permanent: Moratorium
A suspension or freeze on enforcement or insolvency processes called a “moratorium” has been introduced, providing a formal breathing space for struggling businesses to pursue rescue plans. It effectively places companies on a payment holiday and prevents creditors from enforcing their debts. The moratorium will embargo petitions, orders, and resolutions for winding up, appointments of administrative receivers and administrators and the crystallisation of floating charges.
Whilst the directors remain in control, an insolvency practitioner acting as the “monitor” will oversee their actions in relation to incurring credit, granting new security and the sale of non-trading assets.
The moratorium is for an initial period of 20 business days, but directors can extend it for a further 20 business days. It can be further extended up to one year if agreed with creditors; or even longer if ordered by the court.
5. Permanent: Restructuring Plan
If your company is in or about to encounter financial difficulties, a new rescue option known as a restructuring plan may be open to you. In contrast to the other new measures, the restructuring plan is generally available to financial services providers, subject to a number of conditions.
A restructuring plan will bind both secured and unsecured creditors, and require a vote of creditors and/or shareholders and court approval to be put in place.
Crucially, a restructuring plan may be sanctioned by the court even if certain classes of creditor and members have voted against it, subject to certain safeguards for minority interests. Hence, the new restructuring plan is much more flexible than existing rescue options such as schemes of arrangement.
To sum up…
Striking a balance between enabling the survival of coronavirus-impacted businesses and passing the burden onto others is a challenge! Whilst positive for struggling businesses, the new measures will be a source of frustration and concern for creditors and suppliers. Whichever side of the fence you find yourself on, we at mfg can give you clear and commercial advice on the options available to you.
For further information or to discuss generally, on an initial no charge basis, please contact Sam Pedley or Clare Lang, Partners, mfg Solicitors LLP at firstname.lastname@example.org or email@example.com or call 01562 516119 / 01562 516132 or 07391 417090 / 07384 216639.
Sam Pedley and Clare Lang are part of the Firm's Restructuring and Insolvency Sector.