New insolvency and company law changes to support business

A new Corporate Governance and Insolvency Bill has been introduced to Parliament to provide more support to business against the impact of coronavirus, in what has been described as the biggest shake-up of insolvency laws for two decades. It received Royal Assent on 26 June 2020.

The Bill contains insolvency and corporate governance measures and can be accessed from the Parliament website.

Many of the measures in the Bill will need secondary legislation before they come into force, and this will be introduced in due course. Nothing will change until that legislation is introduced.

A key measure will temporarily suspend wrongful trading provisions, until least 30 June, allowing directors to continue trading without the threat of personal liability. 

The Bill will help businesses through:

• introducing a new moratorium to give companies breathing space from their creditors while they seek a rescue
• prohibit termination clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process
• introducing a new restructuring plan that will bind creditors
• enabling the insolvency regime to be more flexible
• temporarily removing the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency
• temporarily prohibiting creditors from filing statutory demands and winding up petitions for coronavirus related debts
• temporarily easing burdens on businesses by enabling them to hold closed Annual General Meetings (AGMs), conduct business and communicate with members electronically, and by extending filing deadlines
• allowing for the temporary measures to be retrospective so as to be as effective as possible

Insolvency

Company moratorium

A company moratorium will provide struggling businesses with a formal breathing space to pursue a rescue plan during which time no legal action can be taken against a company without leave of the court.

It provides 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, but the process will be overseen by a monitor who must be a licensed insolvency practitioner.

Termination clauses

The Bill introduces a permanent change to the use of termination clauses in supply contracts.

So 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 by 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.

Suppliers and other creditors will benefit if more companies are able to survive and repay more of their debts by implementing a 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.

Restructuring

Struggling companies, or their creditors or members, can 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.

This measure should help more companies to be rescued, rather than going through a value destructive liquidation process, potentially giving a better return for creditors, preserving jobs and maintaining productivity.

Statutory demands

The bill contains temporary provisions to void statutory demands made between 1 March 2020 and 30 June.

The Bill will also restrict winding up petitions from 27 April 2020 to 30 June 2020.

These measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of coronavirus.

Suspension of wrongful trading

The Bill will temporarily remove the threat of personal liability for wrongful trading from company directors while they make their best efforts to continue to trade.

This will be for any period of trading between 1 March to 30 June.

This gives directors assurance that they can use their best endeavours to trade through during the coronavirus period without the threat of personal liability for wrongful trading, should the company ultimately become insolvent.

All the other checks and duties on directors remain in place.

Financial services firms

Certain financial services firms and contracts have been excluded from some of the reforms.

The financial services regulators have existing powers to intervene in the business of financial services firms in distress, and the UK has a number of existing special insolvency regimes for certain of these firms.

The Bill’s exclusions for financial services will ensure that these existing special insolvency regimes are unaffected, and that financial market participants have the legal certainty needed to facilitate the efficient functioning of financial markets.

The company moratorium will not be available to certain financial services firms, and will not affect certain financial contracts.

The new termination clauses measures will also not apply to financial contracts or to financial services firms. This is to ensure legal certainty and support the efficient functioning of financial markets.

The suspension of wrongful trading will also not apply to certain financial services firms.

Financial services firms will, however, have access to the new restructuring plan, though with appropriate safeguards including a role for the financial services regulators.

There are no exclusions for financial services firms for the other measures provided in the Bill.

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, 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 their constitution, will have done so in accordance with the law.

Companies that were 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 flexible regime.

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)

Extension of filings

The Bill enables the Secretary of State to make regulations to extend deadlines for 3 types of filing:

• accounts
• confirmation statements (including event-driven filings that are required to be submitted in advance of the confirmation statement)
• registrations of charges

Currently, failure to file certain information with Companies House by the relevant deadline can result in the company paying a late filing penalty, or the directors being prosecuted.

Even though Companies House is taking a proportionate approach to compliance, a failure to meet statutory deadlines can have broader impacts on a company’s record or credit rating.

If you already know that you will not be able to meet your accounts filing deadline, you can apply for a 3 month extension. Those citing issues around COVID-19 will automatically be granted an extension.

Further reference

The Bill and explanatory notes can be accessed from the Parliament website.

The House of Commons Library has published an analysis of the Bill.

Other government measures already in place to support businesses and workers during the coronavirus emergency can be found in our Business after COVID-19: Transition Knowledge Hub.