Corporate Insolvency and Governance Bill published

The Corporate Insolvency and Governance Bill (the Bill) was given its first reading on Wednesday 20 May 2020. Parliament will not be considering the next stages of the Bill until 3 June 2020 so there is still some time, and possibly further amendments, before this is approved and given Royal Assent. More detailed notes will be provided once this Bill has been given Royal Assent, but the headline points of the current draft are:

Statutory demands

This Bill introduces temporary provisions to void statutory demands made between 1 March 2020 and 30 June 2020. The Bill will also restrict winding up petitions from 27 April 2020 to 30 June 2020. These temporary measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19 and applies to all companies not just tenants. This does not appear to apply to statutory demands on individuals and subsequent bankruptcy petitions.

Company moratorium

The moratorium will give struggling businesses a 20-business day opportunity to consider a rescue plan, extendable to 40 business days, with further extensions at the agreement of creditors or the court. The company will remain under the control of its directors during the moratorium, and no legal action can be taken against a company during this period without leave of the court. The process will be overseen by a monitor who must be a licenced insolvency practitioner.

Restructuring plan

The new restructuring plan will closely resemble the existing English ‘Scheme of Arrangement’. The measure will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue option for companies that are suffering financially. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.

It will introduce a cross-class cramdown that will allow dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.

Termination clauses (essential supplies)

The Bill also introduces a permanent change to the use of termination clauses in supply contracts. As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or vary the contract terms with the company (for example, increasing the price of supplies). The customer is required to pay for any supplies made once it is in the insolvency process, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.

The measure also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency.

Suspension of wrongful trading

When determining the liability of the director (the contribution [if any] to a company’s assets), the court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period (1 March to 1 June 2020). Whilst directors may not be liable to contribute to the losses in this period, losses incurred in the periods before and after COVID-19 still remain a factor. Also, directors may still be subject to action for other breaches of duties during the COVID-19 period.

Annual general meetings (AGMs) and general meetings (GMs)

The Bill temporarily allows those companies that are under a legal duty to hold an AGM or GM to hold a meeting by other means – even if their constitution would not normally allow it. As a result, directors will not be exposed to liability for measures that need shareholder endorsement, and shareholders’ rights are preserved.

Retrospectivity

The measures relating to company meetings are intended to be retrospective from 26 March 2020 so that any company that has already had to hold an AGM in a way that adhered to social distancing measures, but that as a result did not meet relevant obligations in its constitution, will have done so in accordance with the law. Companies forced to postpone AGMs which were due to be held after 26 March will be given a limited period after the Bill is passed to hold those AGMs using the new flexibilities.

Shareholder rights

The measures will not prevent shareholders from exercising their right to vote on resolutions or other matters brought before the meeting, though they may be prevented from voting in person (rather than by post or by electronic means).

Extensions of filings

The Bill enables the secretary of state to make regulations to extend deadlines for three types of filing: accounts; confirmation statements (including event-driven filings that are required to be submitted in advance of the confirmation statement) and registrations of charges.

This measure is intended to reduce pressure on companies that are currently unable to meet their filing deadlines as a result of COVID-19 related disruption.

If you have any queries in the meantime, please do not hesitate to contact Peter Speight.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.

Source: R3 release Corporate Insolvency and Governance Bill - Overview dated 20 May 2020.