New insolvency legislation to protect struggling businesses announced (Corporate Insolvency and Governance Act 2020) - Relief for debtors, worrying times for creditors?

With news of the Coronavirus pandemic having 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”) came 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, which have already been subject to extensions and were most recently (broadly speaking) set to last until at least 30 September 2020. The majority of provisions have recently been extended further. The most relevant extension for most creditors and debtors will be the one to 31 December 2020.

We have updated this article accordingly and also summarised the extended deadlines in our separate update here.

Whilst the measures will come as a relief to debtors, creditors may be concerned that the measures will cause them hardship, particularly given the length of time they have now been in force for.

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.

Landlords who have issued possession proceedings that were stayed or who would like to urgently now issue such proceedings should also seek advice now that these types of proceedings can recommence.

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 31 December 2020.

Effectively this means that Statutory Demands against companies cannot be served until at least 1 January 2021.

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).

Even whilst the CIG Act was passing through parliament and hadn’t come into 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.

Moratorium

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.

The procedure remains in place until at least 30 March 2021 and entry requirements to access it are being eased.

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

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 wrongful trading provisions (section 214 or 246ZB of the Insolvency Act 1986) have been suspended from 1 March 2020 to 30 September 2020.

Notably, this measure has not been extended and due to come to an end on 30 September 2020. Somewhat surprisingly, no announcement has been made to date to confirm the reasoning behind this protective measure coming to an end whilst creditor action (such as insolvency proceedings or forfeiture) continues to be effectively suspended. It may well be that an announcement will follow at short notice.

In any event, our advice throughout has been that the impact of this measure was limited.

There are a number of companies (broadly speaking financial services) that are excluded from that suspension.

The risks to creditors as a result of wrongful trading provisions being suspended were limited to an extent because the provisions in relation to fraudulent trading remain in force, i.e. directors with dishonest intent were not protected by the suspension. Accordingly, we have been advising throughout that directors should remain very careful when considering whether to trade on (whether there is “light at the end of the tunnel”).

With the suspension of the wrongful trading provisions now apparently coming to an end, it is more important than ever that company directors take the opportunity to carefully review their company’s circumstances and seek advice at the earliest opportunity should they have any concerns in relation to the company’s continued viability.

Termination clauses in supply contracts

The CIG Act introduces an 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 March 2021, 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 a specified amount of days of unpaid rent. The provisions (having already been extended once) are currently set to last until 30 December 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 hwas then extended further with an amendment which took effect on 25 June 2020 and provided for that stay to be extended to 23 August 2020 and a second time, to 20 September 2020.

Creditors were not prohibited fom issuing such proceedings (although such proceedings would then of course initially be stayed).

This deadline was now not further extended. Possession proceedings can be issued again and will no longer be automatically stayed.

Provisions have been introduced to deal with the resumption of possession proceedings, including the requirement of a “reactivation notice” being served (by no later than 29 January 2021) by any landlords whose claims were issued before 3 August 2020.

The relevant Practice Direction (PD 55C) has also been amended to allow for more than the standard period of eight weeks to pass between issuing of a claim and it being first heard. This exemption is currently set to be in place until 28 March 2021 and appears to address the issue of delays in possession proceedings being anticipated.

For any questions regarding the above article or for 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.

(Updated 28/09/20)