The Corporate Insolvency and Governance Bill (“the Bill”) was tabled before Parliament on 20 May 2020. Its second reading is scheduled for 3 June 2020.

As well as a large number of minor amendments to the Insolvency Act 1986 (“the Act”) and the Insolvency (England and Wales) Rules 2016 (“the Rules”), the Bill introduces significant changes or additions to the insolvency and restructuring toolbox. They are:

• the introduction of a Moratorium for companies in, or anticipating, financial difficulty;
• legislation to deal with the contractual rights of suppliers to cease supplying a customer due to its insolvency;
• the suspension of an element of wrongful trading legislation;
• the temporary removal of the threat of winding up proceedings through the Courts; and
• a new procedure to restructure insolvent and solvent companies.

There are also some amendments to filing requirements at Companies House and the holding of company general meetings.

At this time[1] it is important to note that the Bill is not, yet, law and may be subject to change or not be introduced at all. However, we believe that it is highly likely that the Bill will be substantially implemented in the near future. It is, therefore, imperative that, as we pride ourselves on giving clear, independent, timely and affordable advice, we understand fully the additional tools we are about to have given to us as insolvency practitioners.

A Moratorium for companies

It has always been possible to get a moratorium from legal action in advance of proposing a Company Voluntary Arrangement (“CVA”) or Administration.

It is, however, now proposed that there will be a free-standing Moratorium to give struggling businesses formal breathing space from their creditors to formulate and pursue a rescue plan. During the Moratorium no legal proceedings can be started or continued without the permission of the Court.

To obtain a Moratorium a company need not actually be insolvent[2], but its director(s) may believe it is likely to become unable to pay its debts as and when they fall due. In these circumstances, a 20 business day Moratorium is available to all companies, with some limited exceptions for, primarily, financial institutions.

The Moratorium starts with the directors making a statement with regard to the company’s solvency and an insolvency practitioner, who will be called “the Monitor”, making a further statement that the Moratorium is likely to result in the rescue of the company as a going concern. The statements are filed at Court, with the filing date marking the commencement of the Moratorium.

We have highlighted the words above to stress that the Monitor has an obligation to positively believe that the Moratorium will achieve the survival of the company and not just the business through a sale to another company or entity.

No consent is required from creditors before the Moratorium is obtained and the Moratorium can be extended for another 20 business days by the director(s) and for longer with the approval of creditors or the Court. During the Moratorium, the company can continue to trade and, unlike an Administration where control is handed to the Administrator, it is the directors who will be responsible for running the company under the watching eye of the Monitor.

As well as stopping all legal actions, landlords will not be able to forfeit leases and hire purchase providers will not be entitled to collect their assets but a company will be obliged to pay for supplies (including the rent for its premises and the hire purchase payments) utilised during the Moratorium period. The Company must also meet its repayment obligations to lenders.

The Moratorium ends by expiring at the end of its initial or extended period, by the Monitor withdrawing their support, or by the company entering into a formal insolvency procedure, such as a CVA, Administration or Liquidation.

During the Moratorium companies will be expected to advertise its existence on their stationery and websites, will not be able to take credit of over £500 without explicitly informing the supplier and will not be permitted to pay pre Moratorium creditors more than £5,000 or 1% of the total unsecured creditors, whichever is the higher, without seeking permission from the Monitor or the Court. Consent must also be given by the Monitor or the Court to certain dealings with assets outside of the normal course of trading and the granting of security to a creditor.

Like existing insolvency procedures, the Moratorium will not be a perfect solution for all circumstances, but may allow a director to draw breath and, with the assistance of an insolvency practitioner, formulate a plan for the long term survival of the company.

From a creditor’s perspective, whilst the Moratorium may create cashflow difficulties for their business and on down the supply chain, the intention of the Moratorium is that the company should, eventually, repay its debts in full. To do so the creditors are reliant upon the efforts of the company’s directors and employees, the professionalism of the Monitor and the ongoing support of their fellow creditors. Creditors will have the ability to challenge the actions of the directors and/ or the Monitor through the Courts on the grounds that their interests have been unfairly prejudiced.

At Sadlers, we have extensive experience of trading companies in Administration and advising on the right procedure to fit each company’s immediate needs. We are also navigating the current Covid-19 environment for ourselves and can appreciate and empathise with the difficulties that directors are being faced with.

Wrongful trading

Presumably to give directors some comfort in making the decision to trade on, a change in the law relating to wrongful trading[3] has received a lot of press attention following its announcement by the government on 28 March 2020.

Wrongful trading is when a director chooses to cause a company to trade on at a time when they knew, or ought to have known, that the company had no reasonable prospect of avoiding insolvency. The Court can make an order against a director in those circumstances for them to be held personally liable for the worsening financial position from the point that they should have taken action to the date that an insolvency procedure started.

The Bill now removes the calculation to quantify the worsening financial position the period from 1 March 2020 until at least 30 June 2020.

It does not, however, mean that a director who was trading wrongfully in the period prior to or after the period specified above, or both, will escape subsequent prosecution; just that the losses for the period will not be taken into account. All other directors’ duties are intended to continue during the period.

At Sadlers, we are able to provide clear advice to directors, in writing, with regard to their duties and the associated risks.

Supplier termination clauses

To assist directors trade through the Moratorium period it has been recognised that it is key to keep supplies flowing into a business. Many suppliers will threaten to stop supplying a company as soon as there is a hint of insolvency and supply contracts will often be drafted to give them the right to do so.

The Bill therefore provides for these clauses to be ineffective to allow essential supplies to continue, as long as they are paid for. It also prevents a supplier from increasing its prices to claw back outstanding debts.

Suppliers won’t be able to be forced to continue to supply if it, in turn, causes them hardship and there will also be a temporary exemption for small[4] company suppliers.

Similar provisions already exist in insolvency law in relation to key suppliers, such as utilities.

Whether you are a director needing to know how you can still obtain key supplies for your company to continue to trade, or are a supplier wanting to understand what you can and can’t do to protect your own position we, at Sadlers, can provide clear advice to you.

Statutory demands and winding up petitions

A creditor will not be able to present a winding up petition against a company for the period, retrospectively, beginning with 27 April 2020 until at least 30 June 2020, unless the creditor has reasonable grounds for believing that Covid-19 has not had a detrimental financial effect on the debtor, or the debtor would have been unable to have paid the debt in any event.

The Bill also provides for certain Statutory Demands to be declared void and to be unable to form the basis of a subsequent winding up petition.

Much would appear to be subjective in relation to this legislation: eg. what exactly defines a financial effect?

If you are trying to collect a debt from a customer or have received a winding up petition against your company we, at Sadlers, can provide clear advice to you with regard to your next steps.

Restructuring Procedure

In summary, this Procedure is publicised as allowing “Courts to sanction a plan that binds creditors to a restructuring plan if it is fair and equitable and in the interests of creditors”.

It is, in reality, very similar to the existing Scheme of Arrangement provisions within the Companies Act 2006.

Unlike a CVA, the Restructuring Procedure will have the ability to bind both unsecured and secured creditors. It is intended to be available to both solvent and insolvent companies and, having been presented to the Court, creditors will be invited to vote on the plan.

Creditors will be separated into classes, all of which will vote independently. The Procedure will require the approval of 75%, by value, of creditors voting within each class, however, ultimately it is for the Court to decide whether the plan is just and equitable. If a class of creditors votes against the plan, the Court may still decide that the plan can go ahead and that those dissenting creditors will be bound by it. This is being termed a “cross-class cram down”.

At Sadlers, we have advised upon Schemes of Arrangement and acted as Supervisor to numerous CVAs. We are well placed to provide independent advice to directors of companies of all sizes that wish to consider whether a Restructuring Procedure would solve the financial problems that they are facing.

General Meetings of companies and Companies House filing requirements

Whilst not particularly relevant to insolvent companies, it will be useful for directors to know that the Bill releases companies from the obligation to hold physical Meetings that would be in contravention of current public gathering and social distancing restrictions.

Companies House has already announced that it is relaxing the deadlines for certain documents to be filed. Normally, such omissions would result in a fine, criminal sanctions for the director(s) or the company being struck off the Register.

The extended periods must, however, not exceed:

• 42 days where the existing period is 21 days or fewer; and
• 12 months where the existing period is 3 to 9 months.

Click for our Guide to the Corporate Insolvency and Governance Bill to print and keep.