This Commons briefing provides an outline of the main measures of the new Corporate Insolvency and Governance Act 2020. The Act introduces permanent measures to update the UK insolvency regime, and temporary measures to give struggling businesses a lifeline during the current coronavirus crisis.
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Due to the current coronavirus pandemic and national lockdown, many otherwise economically viable businesses are experiencing significant trading difficulties. The concern is that the disruption will give rise to a wave of business insolvencies.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) received Royal Assent on 25 June 2020. The Act introduces permanent measures to update the UK insolvency regime, and temporary measures to give struggling businesses a lifeline during the current coronavirus crisis. Almost all its provisions commence on 26 June 2020, save that most of the temporary business protection measures it enacts have retrospective effect from 1 March 2020.
The Bill was fast-tracked through Parliament. It was the Government’s view that the measures were urgently needed to support businesses during the current Covid-19 crisis, to give struggling but viable companies the flexibility and breathing space they need to continue trading. There was broad cross-party support for the Bill.
The Act consists of eight measures which conveniently fall into two sets: permanent changes to insolvency law and temporary changes to insolvency law and corporate governance.
The Act’s permanent insolvency measures (previously announced by the Government, and in development before Covid-19) represent a major change to UK insolvency law and, in some ways, represents a shift toward a business rescue culture more in line with U.S. insolvency (chapter 11). The Act’s new corporate restructuring tools are:
- A free-standing moratorium for UK companies to give companies a formal “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium no creditor action could be taken against the company without leave (i.e. permission) of the court. The moratorium would be overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company would remain with the directors (in effect, a “debtor in possession” process).
- A new restructuring plan to help viable companies struggling with debt obligations to restructure. It allows the court to sanction a restructuring plan that binds creditors if it is “fair and equitable” and in the interests of creditors. In other words, creditors vote on the plan, but the court can impose it on dissenting creditors (“cross-class cram down”).
- A prohibition on termination (or so called “ipso facto”) clauses that engage when a company enters an insolvency procedure, the new moratorium or begins a restructuring plan. In effect, the Act will prevent suppliers from stopping their supply while a company is going through a rescue process. The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business. There is also be a temporary exemption for small company suppliers during the Covid-19 emergency.
The aim of the Act’s temporary insolvency measures is to support businesses during the pandemic, help them to avoid insolvency and survive as a going concern. The measures consist of the following:
- Temporary suspension of the wrongful trading rules. The Act removes the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency. The measure applies retrospectively from 1 March 2020 to 30 September 2020. All the other checks and balances on directors would remain in place.
- The Act temporarily removes the threat of statutory demands and winding-up petitions where unpaid debt is due to Covid-19 (two measures). Statutory demands will be void if served on a company during the “relevant period” (between 1 March and 30 September 2020). Winding-up petitions presented during the relevant period that claim a company is unable to pay its debts will be reviewed by the court to determine the cause of non-payment. If a company cannot pay its debts because of Covid-19, no winding up order will be made.
The Act also contains temporary corporate governance measures intended to relieve the burden on companies and other types of business registered at Companies House and allow them to focus all their efforts on continuing to trade. Specifically, the Act contains measures that:
- Temporarily give companies and other bodies greater flexibility to hold Annual General Meetings (AGMs) and other meetings in a safe and practicable manner in response to the pandemic. This measure applies retrospectively from 26 March 2020 to 30 September 2020. Additionally, the Act allows companies and other bodies to postpone their AGMs. Directors would not be exposed to liability for failing to hold an AGM in accordance with a company’s constitution or acting without shareholder endorsement.
- Temporarily extend filing deadlines at Companies House. The Act provides for a temporary extension to the period allowed for the directors of a public company to comply with their obligation under section 441 of the Companies Act 2006 to deliver accounts and reports for a financial year to the Registrar at Companies House. The measure applies retrospectively from 26 March 2020 and ends on whichever is the earlier of, 30 September 2020, and the last day of the period of 12 months immediately following the end of the relevant accounting reference period. In addition, the Act empowers the Secretary of State to make regulations to extend the deadline for certain other filings at Companies House. This power expires on 5 April 2021.
The temporary measures are all time limited measures introduced to support UK companies during the Covid-19 crisis. However, some of these dates are extendable.
The insolvency law measures in the Act are “reserved” in relation to Wales, in some respects devolved in Scotland and are fully transferred to Northern Ireland. The corporate governance measures on meetings and filings apply to the whole of the UK. Company law is a reserved matter in England and Wales and in Scotland.
This Commons briefing provides an outline of the main measures of the new Act.