With news of the Coronavirus pandemic appearing to have caused a global economic decline referred to even as the worst recession since the Great Depression, it is unsurprising that many businesses find themselves struggling financially, particularly (and hopefully only!) in respect of short term cashflow.
The government has made several announcements on measures intended to support struggling businesses.Some have come into force fairly early on in the pandemic. The so far most significant piece of legislation, the much anticipated Corporate Insolvency and Governance Act 2020 (the “CIG Act”) has finally also come into force on 26 June 2020.
It should be noted that, at this stage, the measures provide certain protection to companies. No equivalent provisions have been announced for sole trader businesses but it can be hoped that, if certain proceedings were brought against such small businesses that couldn’t have been brought against incorporated businesses, the Courts may be minded to exercise discretion in favour of small debtor businesses wherever possible in the circumstances. The government’s guidance on the CIG Act’s objectives would certainly suggest they should.
The government confirmed its intentions with the legislation as follows:
“The overarching objective of this Bill is to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time. The measures are designed to help UK companies and other similar entities by easing the burden on businesses and helping them avoid insolvency during this period of economic uncertainty."
The measures are primarily temporary measures, currently set to last until at least 30 September 2020 but may be extended further in due course.
Whilst the measures will come as a relief to debtors, creditors may be concerned that the measures will cause them hardship.
Advice for creditors and debtors
Leathes Prior can advise creditors who are seeking to put themselves in the best possible position to recover book debts in the current circumstances.
Similarly, we would urge debtors not to rely too readily on the protective measures. Particularly in view of potential offences such as breaching fraudulent trading provisions, it is important that debtors ensure their financial circumstances are continually monitored and documented and advice is sought at the earliest opportunity should there be any concerns.
The measures introduced in more detail are as follows:
Suspension of Statutory Demands and Winding-up Petitions
Perhaps the most unexpected element of the CIG Act are the provisions in relation to statutory demands and winding-up petitions. It had previously appeared that the protections awarded by the measures may be limited to rent arrear debts. The legislation does, however, go a lot further and covers all debts owed by a company.
No winding-up petition can be presented on or after 27 April 2020 on the grounds of a statutory demand having been served (and not complied with), if the demand was served in the period from 1 March 2020 to 30 September 2020.
Effectively this means that Statutory Demands against companies cannot be served until at least 1 October 2020.
Although creditors can ordinarily present winding-up petitions against insolvent companies even without prior service of a statutory demand, the CIG Act provides that a creditor can only do this now (in the period of the limitations on service of statutory demands) if they have reasonable grounds to believe that coronavirus has not had a financial effect on the debtor company or the debtor company would have been insolvent even if coronavirus had not had a financial effect on the debtor company. The definition of coronavirus having a “financial effect” on a debtor company is fairly wide and likely to be fairly easily met. It therefore appears unlikely that there will be any significant volume of winding-up petitions being accepted by the courts for the time being.
The provisions have retrospective effect from 27 April 2020. This has the effect for example that winding-up orders made after 27 April 2020 but before the CIG Act came into force will need to be rescinded (unless the Court would have made the same order had the Act already been in force at the time).
Whilst the CIG Bill is not yet in force, the Courts have already commenced taking it into account in their decision-making process and, accordingly, allowed an injunction in favour of a debtor company which was seeking to stop a creditor from presenting a winding-up petition against it.
A new insolvency procedure in the shape of a free-standing 20 day (extendable) moratorium is introduced. This will be monitored by an insolvency practitioner whilst the day-to-day running of the struggling company remains with the directors.
During the moratorium the business is protected from most other insolvency proceedings being commenced as well as enforcement action and issuing of legal proceedings generally by creditors.
New restructuring procedure for companies in financial difficulties
A new restructuring process is intended to be available to companies already in or likely to encounter financial difficulties. It therefore applies to both solvent and insolvent companies.
It is similar to a CVA (company voluntary arrangement) in that it requires the consent of a certain level of creditors (or court approval). Once agreed, it binds all creditors, unsecured as well as (unlike CVAs) secured creditors.
Suspension of liability for wrongful trading
The wrongful trading provisions (section 214 or 246ZB of the Insolvency Act 1986) have been suspended from 1 March 2020 to 30 September 2020. There are, however, a number of companies (broadly speaking financial services) that are excluded from that suspension.
Wrongful trading describes the situation when a company director allows a company to continue to trade although he/she knew or should have known that the company was insolvent and had no prospects of trading out of difficulty. This offence (pursuant to Section 214 Insolvency Act 1986) results in personal liability of directors for company debts if the company is placed into liquidation at a later stage.
The risks to creditors as a result of wrongful trading provisions being suspended are limited to an extent because the provisions in relation to fraudulent trading remain in force, i.e. directors with dishonest intent are not protected by the suspension. For the same reason though, directors should remain very careful when considering whether to trade on, in order to avoid the risk of being considered to have dishonestly sought to fall within the protections of the suspension of the wrongful trading provisions.
Termination clauses in supply contracts
The CIG Act introduces and additional clause to the Insolvency Act 1986 providing that, when a company becomes subject to an insolvency procedure (including the new moratorium), termination clauses in supply contracts can no longer be exercised by the suppliers during the period of that insolvency procedure (except for with the consent of the court/office-holder/company).
That suspension of termination clauses does not, however, until 30 September 2020, apply when the supplier is considered a “small supplier”, i.e. a business or individual with turnover of no more than £10.2 million, balance sheet of not more than £5.1 million and no more than 50 employees. Suppliers who don’t fall within that exemption but consider that it causes them hardship in their specific circumstances should seek advice in relation to making an application to be granted an exemption by the Court.
Unlike the provisions in relation to winding-up petitions and wrongful trading, the provisions made in relation to termination clauses in supply contracts do not have retrospective effect.
In an insolvency context, one complication this may cause in the so called “pre-pack” administrations is that supply contracts are no longer automatically terminated on oldco’s insolvency and additional arrangements therefore need to be made in relation to continuing supplies to newco.
Prohibition on forfeiture for non-payment of rent (in business tenancies)
The Coronavirus Act 2020 (in force since 25 March 2020) had already provided a prohibition on forfeiture for non-payment of rent and prevents landlords pursuing business tenants under the provisions of Commercial Rent Arrears Recovery (CRAR) unless they are owed at least 90 days of unpaid rent. The provisions (having already been extended once) are currently set to last until 30 September 2020 but may be extended further.
Stay of possession proceedings brought under CPR Part 55 (not including trespass) and enforcement proceedings in relation to orders for possession (warrant or writ of possession)
Coronavirus pandemic-related updates to the Practice Direction in relation to possession proceedings came into effect from 18 April 2020. These provided for possession proceedings brought under CPR Part 55 (not including trespass) and enforcement proceedings in relation to orders for possession (warrants or writs of possession) to be stayed (for a period of 90 days). The provision has already been extended further with an amendment coming into effect on 25 June 2020 which will provide for that stay to be extended to 23 August 2020.
Creditors may, however, note that it is not prohibited to issue such proceeding (although such proceedings would then of course initially be stayed).
For any questions regarding the above article or afor further advice, contact the Insolvency & Business Recovery Team by email or by calling 01603 610911.
Note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.