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Temporary provisions for COVID-19 in the Corporate Insolvency and Governance Bill

Posted on 1st June, 2020

As anyone who has opened an e-mail recently will know, we are in ‘unprecedented times’. Many of the usual rules by which businesses operated have been changed, either explicitly as part of the government’s mitigation strategy, or in practice as the changed business environment introduces new considerations. Against this backdrop, the government has published the Corporate Insolvency and Governance Bill, which could become law in July.

The overall thrust of the bill is to move towards a system where businesses get protections from creditors aimed at alleviating temporary problems and facilitating sales as a going concern. Broadly speaking, it is split into permanent changes and temporary, COVID-19 related provisions. There are likely to be changes to the bill before it becomes law, but it is worth looking at the temporary changes now because they could affect decisions which businesses need to make urgently.

Limitations on landlords which are owed money have been well publicised but the provisions in this bill will apply to all debts. Moreover, we are looking at all sectors, even those not most exposed to the COVID-19 shutdown.

The temporary provisions apply over the ‘relevant period’. This is 1 March 2020 to the later of 30 June 2020 or 30 days after the act comes into force (so in practice, 30 days after it comes into force, although the period can be shortened by regulations).

Wrongful trading is amended to be more favourable to directors trying to trade their company through the difficulties. Courts are to assume that a person is not responsible for the worsening of the financial situation of the company when assessing what contribution that person should make to the company’s assets.

There are exceptions, mainly for financial services, but this should provide some comfort for directors faced with a difficult situation. Directors are still subject to the requirement to act in the best interests of creditors where the company is, or is likely to become, insolvent, so the usual advice on trading in financial distress is still valid. What it does is recognise that decisions are being made in circumstances for which there is little experience on which to draw and therefore protects directors acting in good faith. Misfeasance, antecedent transactions and fraudulent trading provisions are unaffected.

A second temporary measure is limitations on winding up a company affected by COVID-19. If served during the ‘relevant period’ a court will be unable to wind up a company for failing to respond to a statutory demand, and no petition may be presented during the ‘relevant period’.

There is an exception to this prohibition, which may not be as useful in practice as it appears. If a creditor can show that “coronavirus has not had a financial effect on the company” or if the circumstances leading to the petition “would have arisen even if coronavirus had not had a financial effect on the company”, then they may still present the petition.

How will a creditor demonstrate the exemption? There may be clear-cut cases, but almost all businesses are affected so the counterargument tends to make itself. Even if the exemption applies, there will be significant difficulty for a creditor in obtaining the necessary information to properly put its argument; especially with the relatively short timeframe. Any petition presented now, before the bill becomes law, will not be effective unless the exemption is satisfied.

There is a useful temporary exemption for smaller suppliers to one of the proposed permanent changes. Ipso facto clauses, those which terminate contract for supply of goods and services when the counterparty is subject to an insolvency procedure, are to be restricted. This has scope to be controversial, as it opens the possibility of businesses being unable to take what has been seen as sensible steps to protect themselves from continuing to trade with a party which is unlikely to be able to pay. The reason for the proposal is to avoid a business which could be sold as a going concern disappearing before that can happen. These are fairly fundamental considerations which often split on ideological lines, so this part of the bill is ripe for change.

At this stage, what we can be fairly confident of is that smaller suppliers (one with any two from three: turnover < £10.2m, balance sheet < £5.1 or fewer than 51 employees) will be initially exempt. It is currently set at a short exemption, however, of one month after the law comes into effect. It is not specifically COVID-19 related but will help in the circumstances.

There is perhaps one more thing we can take from this. By including the temporary and permanent provisions in the same bill it looks likely that this will pass relatively quickly. It is worth considering now if it will affect how your business is planning to act in the near future.

David Artley, Solicitor, Corporate and Commercial

 

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