Corporate Insolvency and Governance Bill 2020
The above bill has been placed before Parliament.
Following its first reading on 20 May 2020, a second reading is due on 3 June 2020 with the Act coming into force in relatively short order.
The legislation seeks to deliver on the Government’s promises, made early in the Coronavirus Pandemic, to protect business from predatory debt collection tactics.
It is important to stress that the Government has published a Bill which will inevitably be subject to change before it becomes legislation. The broad themes are however clearly set out and it is helpful for businesses to obtain an overall understanding of the likely effects of it, so that they can prepare themselves in advance.
It is proposed a system be introduced which allows a company to enter into a moratorium where it can be said that is likely to result in the company’s rescue as a going concern. A statement from the Directors needs to be given confirming that the company is currently unable to pay its debts or will become unable to do so. Initially lasting for 20 business days, the moratorium can be extended for a further 15 business days. The company will need to file the necessary documentation at Court to obtain the moratorium and would also need the support of a monitor.
The effect of the moratorium will be similar to Administration where its existence automatically freezes enforcement or insolvency processes and restricts the company from obtaining credit or providing security over its assets to creditors.
The intention of this new process is clearly to allow companies some breathing space to engage with their creditors, with the assistance of insolvency professionals, to agree a timeframe within which the business can recover.
The Government has also sought to address one of the difficulties faced by struggling companies, namely the termination of supplies by creditors. It is difficult for a business to continue to operate, if they cannot acquire their supplies. The Legislation will prevent a supplier from refusing to supply unless arrears are paid. Legislation also envisages that any term in a contract which allows one party to terminate the contract on the insolvency of the other should be suspended. Effectively suppliers will have to continue to supply, as long as the company is able to pay for any additional supplies. The issue of arrears will be dealt with under the terms of the proposals put forward through the moratorium.
Winding Up Petitions and Statutory Demands
It is proposed that any Statutory Demands served on a company between 1 March 2020 and 30 June 2020 should, effectively, be void.
The Court will also reject any Winding Up Petition presented between 1 March 2020 and 30 June 2020, unless the creditor has reasonable grounds for believing that (a) Coronavirus has not had a financial effect on the company; or (b) the facts underpinning the Winding Up Petition would have arisen even if Coronavirus had not had a financial effect on the company. It is very difficult to see how the Government can maintain this wording given that it is almost impossible to think of a business which has not suffered a financial effect as a result of the Coronavirus crisis (except perhaps those who have already stopped trading).
The Government is also intending to introduce legislation allowing companies to defer any AGM which was due to take place during the Pandemic and relieving Directors of the consequence of any failure to hold the AGM within that period.
They are also introducing provisions allowing AGMs to take place remotely, thereby avoiding the necessity for attendees to travel to such meetings and mix with other attendees.
Directors can be made personally liable for the debts of the company, if they continue to trade it beyond the point at which they knew or ought to have known that the business would be unable to trade out of its difficulties. The Bill currently before Parliament anticipates that a Court should assume that the company’s worsening financial position between 1 March 2020 and 30 June 2020 is not the responsibility of the Directors. In its present form, the wording would tend to suggest that Directors have no responsibility for the performance of the company during that period. It is likely that wording will be amended before the Bill is passed into law, perhaps by making it a rebuttable presumption that the actions of the directors did not make things worse. It is also important to remember that Directors of insolvent companies are subject to other statutory duties which may expose them to liability during this period.
The Government is clearly keen to avoid a rush of insolvencies once we begin to trade out of the current crisis. It is however important for them to strike a balance between protecting companies and simply passing the financial burden onto others. That is a very difficult balance to strike. There is no point in protecting certain companies only to find that others cannot survive as a result. By keeping companies in business, it is hoped that the country can trade out of the impending recession more quickly and with less long-term damage being caused.