Corporate insolvency: the proposed new rules

On the 20th of May the House of Commons carried out the first reading of the new proposed Corporate Insolvency and Governance Bill, which is set to bring substantial changes to the current rules. Of course, the below is not yet law, however, it provides a good indication in the direction in which things are heading. A second reading is scheduled for the first week of June 2020.

The aim of the bill is to provide more debtor-friendly provisions that will assist in rescuing struggling companies. These include:

•             New statutory moratorium process

•             New restructuring plan procedure

•             Provisions invalidating contractual provisions in contracts (relating to the supply of goods and services, triggered by insolvency proceedings)

There will also be specific Covid-19 provisions that will assist during the pandemic, and amongst other things will allow the mitigation of director liability for wrongful trading and restriction in presenting winding-up petitions.

New Moratorium Process

The following entities meet the eligibility criteria for the new process:

•             Companies registered under the Companies Act 2006 (CA 2006) in England, Wales or Scotland

•             Unregistered companies that can be wound up under Part 5 of the IA 1986

•             Overseas companies that are otherwise eligible

•             Limited liability partnerships 

The moratorium will have to be proposed by the company’s directors. The process will be commended by an out of court filing or a Court Order. The moratorium will come into effect when the process is started (by filing the required documents) or on the date of the Court Order. It will last for 20 business days but there will be scope for an extension by a further 20 days without the creditors’ consent, a year with consent, or until a date specified by the Court.

During the Moratorium

The companies’ affairs will be monitored during the moratorium by an officer of the Court (who has to be an insolvency practitioner). The directors will be able to retain broad control of the company. Other aspects will disable landlords from forfeiting leases without court permission or enforcement of any security will require the Courts consent.

The company will have to disclose the existence of the moratorium to any credit provider over £500. The company may not enter into market contracts or financial collateral arrangements.

The moratorium may be ended by the monitor if in their opinion it is no longer required, rescuing the company has been achieved, or the monitor may no longer carry out their function. The moratorium will also end if the company enters into the insolvency process.

When the bill is eventually enacted, a temporary period of one month will introduce temporary insolvency rules. While these are in place;

•     Directors can file for a moratorium out of court even if their company is subject to a winding-up petition

•     The monitor’s statement in support of the moratorium can qualify their view that the moratorium would be likely to result in the company being rescued as a going concern, with the caveat that their view does not take into account any worsening of the company’s financial position due to the coronavirus

Invalidating Terminating contractual clauses

The new provisions mean that when a company goes into a formal insolvency process, a supplier to that company is not entitled to cease supplying goods or services under their contract simply because of the insolvency process. The provisions operate by invalidating any termination provision in a contract for the supply of goods or services that is triggered by the customer’s entry into an insolvency process. Furthermore, a supplier cannot demand payment of outstanding pre-insolvency charges as a condition of continuing supply.

Wrongful trading

The provisions do not have an expiry date. They concern the period between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is later). The provisions largely suspend the potential for wrongful trading liability to be incurred during the relevant period. There is a blanket requirement on courts to assume that a director is not responsible for any worsening of the financial position of the company or its creditors during the relevant period. There is no requirement to show that the deterioration of the company’s financial position was due to the COVID-19 pandemic.

Restriction in Winding up petitions

The presentation of debt-related winding-up petitions is heavily restricted during the relevant period. The blanket restriction on petitions based on statutory demands applies to petitions presented on or after 27 April 2020, where the prior statutory demand was served during the relevant period. The Bill imposes restrictions that seek to completely prevent winding-up petitions from being presented to the Court after this date.

The Bill generally provides that a creditor cannot present a winding-up petition on the grounds of a company’s inability to pay its debts unless they have reasonable grounds for believing that the coronavirus has not had a financial effect on the company, or that the debt issues would have arisen anyway.

The Court will have powers to make a remedial order to restore the position as if a petition had not been presented. However, the court will also have the discretion to make a winding-up order if it is satisfied that the company’s inability to pay its debts would have arisen anyway despite the Covid-19 pandemic.

Existing Winding-up Orders

Existing winding-up orders will be void where all the following apply:

•      The court has made a winding-up order between 27 April 2020 and the day before the Bill comes into force.

•      The order was made on the grounds that the company was unable to pay its debts

•      The court would not have made the order under the new restrictions

Of course, all of the above is subject to change between now and when the Bill becomes Law. We will report back as soon as we are able to, on any further developments in this area.

If you would like any more information in relation to this article then please feel free to contact me via email: mohammed.akram@bowlinglaw.co.uk or visit my profile.

Website content note: The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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