The UK's Corporate Insolvency and Governance Bill

Out-Law Analysis | 20 May 2020 | 6:48 pm | 5 min. read

The UK government has published its Corporate Insolvency and Governance Bill, aimed at helping companies maximise their chances of survival, protecting jobs and supporting the UK's economic recovery.

Some of the measures contained in the Bill have been under development for years, while others have been introduced specifically to cater for the current coronavirus crisis. Some of the measures will also only apply for an initial temporary period, but the UK parliament retains the power to extend these periods if necessary.

The Bill has now been laid before the UK parliament and is expected to be implemented into law in short order. The key measures included in the Bill are summarised below.

Company moratorium

Insolvent companies or companies that are likely to become insolvent can obtain a 20 business day moratorium period which will allow viable businesses time to restructure or seek new investment free from creditor action. The moratorium is available to all companies with limited exceptions. In order to obtain the benefit of the moratorium the directors will need to make a statement that the company is, or is likely to become, unable to pay its debts and the 'monitor' must make a statement that it is likely that a moratorium for the company would result in the rescue of the company as a going concern.

The directors will be able extend the initial 20 business day moratorium for a further 20 business days if they file a notice and certain other documents at court. This cannot be done until the last five business days of the initial period of the moratorium. Any extension of the moratorium beyond 40 business days will require the consent of the creditors or the court. 

Coronavirus has a “financial effect” on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus.

The moratorium bears similarities to the existing administration moratorium but will be overseen by a 'monitor' who must be a licensed insolvency practitioner. The monitor’s role will be limited to ensuring that the company complies with the requirements of the moratorium and approving sales of assets outside the normal course of business, as well as approving any grant of new security over the company’s assets. The directors will remain in charge of running the business on a day-to-day basis (known as a ‘debtor-in-possession' process with the company being the ‘debtor’).

Creditors will have the ability to challenge the actions of the directors or the monitor on grounds that their interests have been unfairly prejudiced.

Restructuring plan

A new restructuring procedure is to be introduced, which is modelled on the existing scheme of arrangement procedure but with the addition of the ability to cram down across classes of creditors, which is a feature of US Chapter 11 bankruptcies. Unlike a company voluntary arrangement (CVA), it will have the ability to bind both secured creditors and unsecured creditors.

There will be no financial entry conditions which mean that both solvent and insolvent companies can propose the plan. Creditors will vote on the plan in separate classes, which will resemble those that feature in schemes of arrangement. The plan will require the approval of a minimum of 75% in value in each class of those voting.

However, it will be for the court to grant final approval to the plan if it feels the plan is just and equitable and the plan can be approved by the court even where one or more classes do not vote in favour (these creditors are known as dissenting creditors).

Statutory demands and winding up petitions

The Bill includes temporary provisions to restrict statutory demands and winding up petitions issued against companies during the pandemic where the debt is unpaid for reasons relating to Covid-19.

A petition cannot be presented by a creditor during the period beginning with 27 April 2020 (it has retrospective effect) until 30 June 2020 or one month after the coming into force of this Bill, whichever is the later, unless the creditor has reasonable grounds for believing that (a) coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor.

As to the meaning of "financial effect", it appears to be a low threshold. Coronavirus has a “financial effect” on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus.

In a similar vein, no petition for the winding up of a company can be presented on or after 27 April 2020 on the ground that the company has failed to satisfy a statutory demand if the relevant statutory demand was served during the period beginning with 1 March 2020 and ending with 30 June 2020.

Supplier termination clauses

Suppliers will often stop supplying or threaten to stop supplying a company that has entered into an insolvency process or a restructuring procedure. The supply contract often provides the supplier with the contractual right to do this, but such supplies can often be crucial to achieve continued trading and a rescue the business.

There are already measures in place to stop certain key suppliers, e.g. utility companies, from stopping supplies only by reason of the company's insolvency and where their supplies continue to be paid for. However, the Bill will prohibit all suppliers from stopping supplies by reason of the company's insolvency if the supplies continue to be paid for. It will also prevent suppliers from amending the contractual terms in order to force increased payments.

Suppliers can be relieved of the obligation to continue supplies if it causes hardship to the supplier's business and there is also a temporary exception for small company suppliers during the emergency.

Suspension of wrongful trading

The wrongful trading provisions in the 1986 Insolvency Act 1986 provide protection to creditors by imposing personal liability upon directors of insolvent companies that continue to trade the company's business past the time at which there is no reasonable prospect of the company avoiding insolvency and in a manner that causes an increase in the company's net liability to its creditors.

The Bill will temporarily suspend such wrongful trading provisions for a period of four months with retrospective effect from 1 March 2020 to 30 June 2020. Liquidators and administrators will therefore be unable bring claims for wrongful trading against an insolvent company’s directors for any losses caused by trading during the period of the suspension of the rules. However, directors' duties to their creditors during such periods continue and it will not prevent liquidators and administrators bringing claims against directors for breaches of such duties.

Companies House filing requirements

Companies are required, primarily by virtue of the 2006 Companies Act, to file prescribed documents by fixed deadlines at Companies House each year. Missing the deadline automatically results in a financial penalty and can result in criminal sanctions for the company's directors or the company being struck off the register of companies. Extensions of time have already been offered to companies but the Bill allows the Secretary of State to temporarily make further extensions to deadlines.

The extended period for the filing must not exceed:

  • 42 days, in a case where the existing period is 21 days or fewer, and
  • 12 months, in a case where the existing period is 3, 6 or 9 months.