The Corporate Insolvency and Governance Act 2020
The Government implemented both temporary and permanent reforms to the UK insolvency regime in light of the COVID-19 (COVID) pandemic and resulting economic crisis. Significant changes were made by the Corporate Insolvency and Governance Act 2020 (CIGA) which aimed to ease the pressure on businesses under financial pressure and avoid mass insolvencies.
CIGA came into force on 25 June, following an accelerated parliamentary process.
The moratorium procedure
CIGA introduced a new standalone moratorium procedure with the intention of giving companies space from creditors to turn around their business and avoid insolvency. The moratorium covers an initial period of 20 days. This initial period can be extended without permission for another 20 days and can be further extended with the permission of pre-moratorium creditors or the court. The moratorium involves an insolvency practitioner monitoring the company’s directors, who remain in control.
Companies eligible to use the moratorium should have been:
- Incorporated under the Companies Act 2006 or, if unregistered, would be wound up under the Insolvency Act 1986.
- Unable to or likely to be unable to pay its debts in the opinion of the directors.
- Rescuable as a going concern in the opinion of the insolvency practitioner.
Wrongful trading (temporary)
CIGA also temporarily lifted wrongful trading restrictions which would prevent a company from operating during an impending insolvency. Normally directors could be subjected to personal liability for continuing to trade in the face of an impending insolvency under Section 214 and Section 246ZB of the Insolvency Act 1986.
CIGA inserted Part 26A into the Companies Act 2006 (Arrangements and Reconstructions for Companies in Financial Difficulties) which applies to companies liable to be wound up under the Insolvency Act 1986. This permits creditors with genuine economic interests from participating in the formulation of a restructuring plan and for the court to be able to sanction plans it considers to be just and equitable.
The “Ipso Facto” regime
CIGA made changes to the effect of Ipso Facto termination clauses; these automatically entitle a party to terminate a contract or automatically terminate a contract without any election being made in the event that a certain event occurs, for example, insolvency. Suppliers cannot end contracts for non-payment of pre-insolvency debts.
The effect of this regime is widespread and some provisions have been included to prevent unfairness to suppliers. For example, they are able to apply to the court to be exempt from the regime if it would cause undue hardship to continue to supply a business. If a company enters into a standalone moratorium, debt owed to the supplier during this period will be prioritised over other creditors. There are exceptions for ‘essential suppliers’ and ‘small suppliers’, which are dealt with under separate legislation.
There were concerns that the Act was rushed without consideration to certain stakeholders. The Pensions Regulator, the Pension Protection Fund, and other retirement scheme representatives felt the changes may negatively impact pensioners, as the moratorium would prioritise debts falling during this period over beneficiaries of underfunded undefined pension schemes. However, some of these concerns were addressed while the Corporate Insolvency and Governance Bill was being debated and also by the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (SI 2020/ 693) which came into force on 7 July 2020. There have also been concerns that that some creditors may be disadvantaged by the suspension of wrongful trading offences.
The temporary provisions will be phased out by the end of September and though the other changes are not subjected to time limits, however this may change in light of future developments.
For further information please contact Paul Cooper: firstname.lastname@example.org or 020 7480 6655