How new legislation could give your business breathing space from insolvency

The Corporate Insolvency and Governance Act 2020 (CIGA) brings in a number of new procedures and measures to help companies facing insolvency as a result of the Covid-19 pandemic and the resulting economic crisis.

Some of the key changes, which came into force on 26 June 2020, introduce amendments to the insolvency regime and are specifically aimed at helping companies keep afloat during the pandemic.

Whilst some changes are temporary, others are permanent and will continue when the economy returns to some semblance of normality

A guide to some of the permanent changes

What happens with termination clauses?

In supply of goods or services contracts, termination clauses will cease to apply on insolvency.

This will prevent suppliers of goods or services to a company from terminating a supply contract if the company enters into a range of insolvency procedures and is designed to preserve supply contracts and assist in a rescue plan.

There are temporary exclusions for smaller suppliers where this would cause hardship (up to 31 March 2021) and permanent exclusions for financial contracts.

Can my business obtain a moratorium from any creditor action without having to enter into administration?

Yes, there is a free standing moratorium for distressed companies that can realistically be rescued as a going concern.

A company can obtain an initial 20 business day moratorium enabling it to consider restructuring or new investment options.

The directors of the company still run the business while an insolvency practitioner (known as a monitor) is appointed to oversee the process.

The directors can apply for the initial period to be extended by a further 20 days. If necessary, a moratorium can be extended up to 12 months by creditor vote, or for an unlimited period by an application to the Court. Certain payments must be made by a company during the moratorium including rent, salaries, new supplies and finance debts.

What is the new restructuring procedure?

This is supervised by the Court and is largely based on schemes of arrangement. The process requires 75% in value of creditors to approve, although the Court can bind certain dissenting creditors.

A guide to some of the temporary changes

What's happening with statutory demands and winding up petitions?

There are temporary restrictions on the use of statutory demands and winding up petitions:

• Winding up petitions presented on or after 27 April 2020 based on a statutory demand served between 1 March 2020 and 31 December 2020 are banned;
• A creditor cannot present a winding-up petition between 27 April 2020 and 31 December 2020 based on the company's inability to pay its debts unless there are reasonable grounds for believing coronavirus has not had a financial effect, or that the company would have been unable to pay its debts regardless of the effect of coronavirus;
• These provisions are retrospective from 27 April 2020.

Suspension of liability for wrongful trading has not been extended.

A director's personal liability for wrongful trading for the period from 1 March 2020 to 30 September 2020 was temporarily suspended. It has now been reinstated.

A Court was to assume that a director was not responsible for any worsening of the financial position of the company or its creditors. However, that was only an assumption and directors were still subject to the fraudulent trading provisions, directors' disqualification procedure and general duties of directors

Have deadlines for filing accounts been extended?

Yes, deadlines for filing accounts, and other Companies House deadlines were extended. It was also permitted to hold general meetings by other means whether permitted by a company's articles of association or not.

Get in touch

Sophie Driscoll is part of Wards Solicitors' Business Disputes team. She specialises in a wide range of contractual disputes with a particular interest in insolvency matters for both private and business clients.

Get in touch with Sophie on 01934 413535 or email sophie.driscoll@wards.uk.com