Overview of Bill
Introduce new corporate restructuring tools to the insolvency and restructuring regime to give companies the breathing space and tools required to maximise their chance of survival
Temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability for wrongful trading and to protect companies from creditor action
Amend Company Law and other legislation to provide companies and other bodies with temporary easements on company filing and annual general meetings
Who will it apply to?
These measures will apply to:
- Unregistered companies
- Limited Liability Partnerships
- Charitable Incorporated Organisations
The Bill will:
- Introduce a new moratorium to give companies breathing space from their creditors while they seek a rescue
- prohibit termination clauses that engage on entering an insolvency procedure, entering the new moratorium or beginning the new restructuring plan procedure. It will also prevent suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process
- introduce a new restructuring plan for companies in financial distress which include new cross class cram down procedures that allow a class of creditors to be bound by the restructuring plan even if they do not agree to the plan. This provision takes steps to provide safeguards for affected creditors in these situations
- enable the insolvency regime to flex to meet the demands of the crisis
temporarily remove the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency
- temporarily prohibit creditors from filing statutory demands and winding-up petitions for COVID-19 related debts
• temporarily give companies and other bodies greater flexibility to hold Annual General Meetings (AGMs) and other meetings in a safe and practicable manner in response to the pandemic
• temporarily ease burdens on businesses by extending filing deadlines at Companies House
allow for some of the temporary measures to be retrospective, giving immediate support to businesses during COVID-19
The Bill gives struggling businesses a formal breathing space to pursue a rescue plan. It creates a moratorium during which no legal action can be taken against a company without leave of the court. It is vital to introduce the moratorium now to ensure that companies which are struggling as a direct result of the pandemic are given the opportunity to survive.
How will it work in practice?
Take this example case study:
An SME clothing company, Example Fashion Ltd, suffered a bad debt of £250,000 after one of its major customers, a department store, entered administration. According to its customer’s administrator, there was very little hope of receiving any of the £250,000 owed through the administration.
The department store had been the company’s largest customer. However, following media stories about the poor financial status of the department store over the previous few months, the directors had worked hard at sourcing new customers so as not to be as dependant on the department store for business.
Accordingly, at the time the bad debt is suffered, the company has a healthy order book for the following six months, but it is not due to receive payment for any of the new customer orders for at least three months. The company is receiving payment in invoices from other, smaller customers but does not have sufficient cashflow to pay all of the debts that are due now, many of which relate to goods and services procured to fulfil the department store contract. The company is what is known as ‘cashflow insolvent’.
While most of its suppliers are supportive, a minority of the unpaid suppliers are threatening to take legal action against the company, and one has already served the company with a– a formal demand for payment that can be a precursor to a winding-up petition.
One of the directors intends to raise money for the company by re-mortgaging her own house. Once these funds are invested in the company, it will be able to repay its creditors. However, the funds will not be available for a few weeks and creditors are threatening legal action now, unconvinced that money will otherwise be forthcoming.
The directors seek advice from an insolvency practitioner (IP). From what the directors tell the IP, the IP believes that the company can be saved via this investment. The IP advises that the company enter a moratorium, a rescue process that will protect the indebted company from creditor action while the additional finance is raised.
The directors and the IP complete the necessary paperwork and file a notice and other documents at court, commencing a moratorium for an initial period of 20 business days. The IP is appointed monitor. Using the income from the smaller invoices, the company is able to pay its ongoing liabilities: wages, rent, goods and services supplied in the moratorium etc.
Unfortunately, soon after the moratorium is entered the director’s re-mortgage is delayed and it becomes apparent that the funds will not be available for a further 6 weeks. The directors tell the monitor about this. Based on the information given to the monitor by the director, the monitor continues to believe the investment will be made and that the moratorium will bring about the rescue of the company as a going concern.
Accordingly, the monitor does not bring the moratorium to an end.
After 15 business days the directors file for a 20-business day extension to the initial period; the monitor completes another statement that it is likely the moratorium will bring about the rescue of the company as a going concern. During this second 20-day period, the re-mortgage is completed, and the funds are injected into the company. At this point, the company ceases to be cashflow insolvent; it is able to pay all of its older debts in full and the ongoing debts incurred following entry into the moratorium. Accordingly, the monitor files a notice at court terminating the moratorium on the grounds that rescue of the company has been achieved.
The measures on statutory demands and winding-up petitions included in the Corporate Insolvency and Governance Bill are temporary measures.
The Bill helps struggling businesses by temporarily removing the threat of winding-up proceedings where unpaid debt is due to Covid-19. It introduces temporary provisions to void statutory demands issued against companies during the emergency. This gives businesses the opportunity to reach realistic and fair agreements with all creditors.
How will it work in practice?
A company supplies ingredients to the restaurant trade and others. As a result of the coronavirus emergency, demand has fallen and so it is no longer able to meet the debts it owes to its own suppliers who start to pressure for payment. The directors are worried the company will be forced into liquidation by the suppliers it owes money to, and that if a winding-up petition is filed with the court then its customers will look elsewhere regardless of the outcome.
During the period that these measures apply, the company will be protected from certain actions its creditors might otherwise take:
- A creditor cannot use statutory demands to threaten that the company will be wound up if it does not pay what is owed. Any statutory demand made in this period will be void, and the creditor must find another way to demonstrate that the company cannot pay its debts.
- Creditors are also prohibited from bringing a winding-up petition against the company unless they reasonably believe that the company’s inability to pay its debts is not the result of coronavirus. If they do present a petition, the court will not will not make a winding-up order until the creditor demonstrates that the pandemic is not the reason the company cannot pay its debts. In addition the fact that the petition has been presented will not be advertised or publicised in advance of the hearing of the petition unless the court has concluded that it is likely that the pandemic is not the reason the company cannot pay its debts. Unless these requirements are met, the company will be protected from being wound up and from the disruption that the petition would otherwise cause (for example to its relationships with its other suppliers and its customers).
- This protection is different to the one provided by a stand-alone moratorium on creditor action, another measure that has been included in this Bill: a moratorium is available to companies regardless of whether their inability to pay their debts is coronavirus-related. It will usually have a shorter duration but applies to a wider range of creditor actions. The moratorium aims to give struggling companies a short breathing space when they need it to take action to deal with their debts, rather than protecting them during a specific period set by the Government.
Under the Bill creditors cannot rely upon an unpaid statutory demand as evidence of inability to pay debts in order to issue a winding-up petition against a company, effectively rendering the statutory demand void for that purpose. The new measure applies to all statutory demands served during the period which:
a. begins with 1 March 2020, and
b. ends with 30 June 2020 (or one month after the coming into force of the Bill when enacted, whichever is the later).
A statutory demand is prevented from forming the basis of a winding-up petition presented at any point after 27 April 2020.
Winding up petitions
A petition cannot be presented by a creditor during the period beginning with 27 April 2020 until 30 June 2020 or one month after the coming into force of the 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 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. However, there is no clear guidance as to how low this threshold is and how creditors should evidence their findings to the court.
Furthermore, given the court is required to consider whether the debtor’s inability to pay is due to coronavirus, these measures will undoubtedly result in additional court time being taken up for this review.#
If you have any questions in relation to any aspect of the Corporate Insolvency and Governance Bill 2020, or if you would like to discuss how to maintain or improve your business's cash flow during these uncertain and challenging times, please do not hesitate to contact Stephen Cowan, Managing Director of Yuill + Kyle.