The Corporate Insolvency & Governance Act 2020 came into force as an Act of Parliament on 26 June 2020.
The Act follows years of consideration, particularly in respect of the new moratorium and restructuring plan proposal, as well as the unprecedented impact caused by the Coronavirus (COVID-19). The Act seeks to ease the difficulties faced by businesses generally and ease the significant economic damage caused by COVID-19. Some of the key provisions are set out below:
Amendments to the Insolvency Act 1986 (IA 1986) and the Companies Act 2006 (CA 2006)
New statutory moratorium process:
Companies and LLPs that are, or are likely to become, unable to pay their debts can seek initial protection of 20 working days on the basis that it is considered likely that a moratorium would result in the company being rescued as a going concern. The moratorium will be overseen by a “monitor” (an insolvency practitioner) and may be extended without creditor consent for an additional period of 20 business days and for up to a year where creditor or court consent is obtained.
New restructuring plan procedure:
This will allow struggling companies or their creditors to propose a plan for restructuring, a procedure similar to a scheme of arrangement. The new procedure will include a “cross-class cram down” feature which will essentially allow dissenting classes of creditors to be bound by the plan, provided that the court deems the cram down fair and equitable and that such creditors would be no worse off than if the company entered into any alternative insolvency procedure.
Company suppliers, subject to certain exceptions, will no longer be able to exercise termination clauses in contracts in relation to the supply of goods or services or vary such contracts on the basis of the company’s insolvency.
Retrospective COVID-19 provisions
Losses incurred by a company during the prescribed period of 1 March 2020 to 30 September 2020 (subject to change), in which the company suffered due to the impact of COVID-19 will be disregarded when declaring that directors are liable for wrongful trading. Directors will still need to remain diligent however as they must still comply with their fiduciary duties.
Winding up petitions:
Statutory demands made between 1 March 2020 and 30 September 2020 cannot form the basis of a winding up petition. Winding-up petitions presented between 27 April 2020 and 30 September 2020, on the basis that a company is cash-flow or balance sheet insolvent will also not be pursuable if the cause of non-payment is because the company cannot pay its debts due to the “financial effect” of COVID-19 on the company’s financial situation.
It will be interesting to see how the above provisions will impact the insolvency framework.
Posted on July 2, 2020