What you need to know about Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. Cathryn Butler and Katie Farmer of Ashfords LLP explain what effect the Act has on the UK's insolvency framework.

What is the Corporate Insolvency and Governance Act 2020?

The Corporate Insolvency and Governance Act 2020 (the ‘Act’) permanently increases restructuring options for businesses experiencing financial difficulties, and included temporary measures aimed at easing some of the most pressing consequences businesses have experienced as a result of the coronavirus (COVID-19) pandemic.

The Act contains significant reforms to the UK's restructuring and insolvency framework, including an accelerated introduction of measures, such as the ‘company moratorium’, which had been in contemplation for some time.

What temporary measures introduced by the Corporate Insolvency and Governance Act 2020 have now come to an end?

Wrongful trading

The Act provided a temporary measure in connection with wrongful trading to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurred during the period 1 March 2020 to 30 September 2020. This assumption was revived on 26 November 2020 and expired on 30 June 2021.

It is important to note that there was no relaxation in directors’ fiduciary duties and obligations.

Winding up moratorium

The Act introduced a moratorium preventing the use of statutory demands and winding up petitions where the reason for the unpaid debt is due to COVID-19.

These measures prevented statutory demands from being served between 1 March 2020 and 30 September 2021 from forming the basis of a winding up petition. Winding up petitions for the period 27 April 2020 and 30 September 2021 were also prevented from being presented unless the creditor could demonstrate either:

COVID-19 has not had a financial effect on the company; or
the reason for the unpaid debt would have arisen even if COVID-19 had not had a financial effect on the company

Should a winding up order be in the period covered by the temporary provisions, the commencement of the winding up will be from the date of the order as opposed to the date of the petition.

While those temporary measures in relation to statutory demands and winding up petitions have now come to an end, The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No 2) Regulations 2021 introduced a new Schedule 10 which came into effect on 1 October 2021, and which provides new temporary changes to winding up petitions.

What are the new temporary changes to winding up petitions?

The presentation of a winding up petition will only be possible where 4 conditions are met:

The debt must be liquidated, due for payment, and not be an “excluded debt” (see below).
The creditor must have delivered a notice to the company in a format complying with paragraph 1(4) and 1(5) of the new Schedule 10 which requires certain identifying details and a statement that if no proposal is made within the period of 21 days from delivery of the notice, the creditor intends to present a winding up petition.
No proposal satisfactory to the creditor is received by that 21 day deadline.
The debt is £10,000 or more.

Excluded debts re defined as “a debt in respect of rent, or any sum or other payment that a tenant is liable to pay, under a relevant business tenancy”. A relevant business tenancy is one to which Part 2 of the Landlord and Tenant Act 1954 applies, or would apply if the relevant occupier were the tenant.

The petition will require a statement that the 4 conditions are met.

These amendments will (at least initially) apply from 1 October 2021 to 31 March 2022.

What permanent measures have been introduced by the Corporate Insolvency and Governance Act 2020?

Company moratorium

The government accelerated the introduction of a long-awaited ‘company moratorium’, a statutory breathing space where directors retain control of companies while considering restructuring options, without creditor pressure. This ‘debtor in possession’ process is a concept familiar in other jurisdictions. Key features of the company moratorium include:

The company moratorium is available to all companies (with limited exceptions) and lasts for an initial period of 20 days. The directors will need to make a statement (some may choose to do that by placing a notice in The Gazette) that the company is, or is likely to become, unable to pay its debts in order to access the moratorium.
Management remains in the control of the directors of the company, but a licensed insolvency practitioner is appointed as ‘Monitor’ to independently oversee the company moratorium and provide objective assessment of whether rescue as a going concern continues to be likely.
During the company moratorium, the company has a payment holiday from supplier debts and no legal action can be taken against a company in respect of pre-moratorium debts without leave of the court.
There is a possibility of an extension of a further 20 business days. Any extension of the company moratorium beyond 40 business days will require the consent of creditors (for periods of up to a year) or the court and requires confirmation that non holidayed pre-moratorium and post-moratorium debts have been paid. If they aren’t paid the Monitor should terminate the moratorium.
Creditors have the ability to challenge the actions of the directors or the Monitor on grounds that their interests have been unfairly prejudiced.

Protection of supplies

Where a company has entered an insolvency or restructuring process or obtains the new company moratorium, the company’s suppliers are not able to rely on contractual terms to terminate, stop supplying or vary the contract terms with the company (for example, increasing the price of supplies).

The customer is required to pay for any supplies made once it is in the company moratorium or insolvency process but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.

The measure allows an office holder or the company to consent to termination. It also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business.

Restructuring Plan

The Act also introduced a new mechanism for a “compromise or arrangement” to be put in place between a company and its creditors and/or shareholders, which is widely referred to as a ‘Restructuring Plan’.

For a company to be eligible for a Restructuring Plan:

it must have encountered, or be likely to encounter, financial difficulties that affect, or threaten to affect, its ability to carry on business as a going concern
the purpose of the Plan must be to eliminate, reduce, prevent or mitigate those financial difficulties

There is no insolvency test, but there must be a degree of existing or forecast financial distress.

The Restructuring Plan is modelled on Schemes of Arrangement under English law (‘Schemes’) which are provided for in the Companies Act 2006. The Act provides that the Restructuring Plan is brought in under a new part of the Companies Act 2006.

Like Schemes, the Restructuring Plan:

is a ‘debtor in possession’ process – there is no insolvency practitioner appointed to administer, supervise or monitor, albeit specialist restructuring advisors will be closely involved in its preparation and implementation
is subject to court oversight and sanction
divides affected members and/or creditors into appropriate classes, depending on how their rights are to be affected
is subject to creditor approval with voting thresholds of 75 per cent by value in each class (Schemes have an additional requirement of 75 per cent in number, which does not apply to the Plan)
if sanctioned, binds both unsecured and secured creditors (unlike a Company Voluntary Arrangement (CVA))

One of the drawbacks of Schemes is the ability for certain creditors to hold out and disrupt a proposal that would otherwise save a company. The Restructuring Plan imports a key feature of US Chapter 11 bankruptcies: a ‘cross class cram down’. The Court has the discretion to impose the Plan on dissenting classes if it considers it fair, and if satisfied that:

none of the members of the dissenting class would be any worse off than they would be if the Plan were not sanctioned (comparing it with what is likely to happen to the company otherwise)
the Plan has been approved by at least one class that would have a genuine economic interest if the Plan were not sanctioned

The cross class cram down enables debt-for-equity swaps to be imposed without shareholder consent, which Schemes cannot achieve, and the potential for empowering junior creditors.

Under the Act, any company which could be wound up under the Insolvency Act 1986, including a foreign company, could be subject to a Restructuring Plan including financial services companies, albeit the Secretary of State has the discretion to disapply the provisions in that sector later.

Where can I see insolvency notices in The Gazette?

You can view all corporate and personal insolvency notices on The Gazette website.

The Gazette also provides a data service which gives access to official intelligence on all UK businesses, corporate and personal insolvencies. Benefits of The Gazette’s data service include:

Bespoke reports - tailored around your specific business
Geo-targeted editions - available for specific geographical targeting (National, London, Belfast, Edinburgh)
Custom filters - specific custom attributes (company number, notice type, key terms)
Data at regular intervals - delivered at a rate to match your business needs (daily, weekly, monthly)

For more information on The Gazette’s data service, contact the team on 01603 985949 or email data@thegazette.co.uk.

Katie Farmer Ashfords Cathryn Butler Ashfords