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Key points from the UK's new Corporate Insolvency and Governance Bill: Moratorium, wrongful trading and winding up

25/05/2020

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United Kingdom

As the UK government prepares to pass new legislation intended to protect companies affected by coronavirus (COVID-19) from creditors, Fieldfisher's restructuring and insolvency specialists assess the likely impact of the new bill.

  The UK government's Corporate Insolvency and Governance Bill was laid before Parliament on 20 May, and is expected to become law in June.

Key provisions

The bill covers:
 
  1. A new moratorium, that enables eligible companies, in certain circumstances, to obtain various protections from creditors;
  2. A new "arrangements and reconstructions" provision for companies in financial difficulty;
  3. Restrictions on presenting winding up petitions and making winding orders;
  4. Suspension of liability for wrongful trading;
  5. Protection of supplies (avoiding certain ipso facto clauses);
  6. Power of the Secretary of State to amend insolvency law to mitigate the effect of coronavirus (COVID-19) on businesses; and
  7. Amendments to meeting requirements for some companies.
Relaxation of wrongful trading rules

Section 10 of the Corporate Insolvency and Governance Bill states that:

"In determining for the purposes of section 214 or 246ZB of the Insolvency Act 1986 (liability of director for wrongful trading) the contribution (if any) to a company’s assets that it is proper for a person to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs".

This provision applies during the "relevant period" between 1 March 2020 and 30 June 2020, or one month after the act comes into force, whichever is later.

There is a long list of companies (such as insurance companies and banks) and entities (such as building societies and credit unions) to which this "relaxation" of wrongful trading rules does not apply.

The necessity of this amendment is puzzling, as it is unclear why a liquidator would make a claim against any properly advised directors, who continued to trade during this period.

Equally, there is a strong argument that directors who fail to take advice, and who may have worsened creditors' positions during this period, should be culpable.

In addition, the relaxation does not affect directors' common law duties to creditors, meaning misfeasant directors may find themselves liable in any event.

Restrictions on winding up petitions and orders

Schedule 10 of the Corporate Insolvency and Governance Bill restricts parties' ability to present winding up petitions and obtain winding up orders, and may result in some that have already been made being nullified.
The bill contains the following relevant provisions:

First, it is not possible to present a petition based on a statutory demand made in the period between 1 March and 30 June 2020 or one month after the bill comes into force, whichever is later (the "relevant period"). This is backdated to come into force on 27 April 2020.

Second it is not possible for a creditor to present a winding up petition against a registered or unregistered company during the relevant period, unless it has reasonable ground for believing:

(a) COVID-19 has not had a financial effect on the company; or
(b) The relevant grounds on which the petitioner relies would have arisen even if COVID-19 had not had a financial effect on the company.The schedule specifies that coronavirus has a “financial effect” on a company if (and only if) the company’s financial position worsens as consequence of, or for reasons relating to, COVID-19.

This provision is to be regarded as having come in to effect on 27 April 2020. If a petition was presented after 27 April 2020 and before Schedule 10 comes into force (and if the creditor did not have a reasonable belief as above), the court may "make such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented".

It appears this could include requiring the petitioner to pay damages. 

Third, if the winding up petition was presented in the relevant period and it appears to the court that COVID-19 had a financial effect on the company before the presentation of the petition, the court may only make a winding up order if (in addition to the usual tests) it is satisfied that the facts, by reference to which the petition has been presented, would have arisen even if COVID-19 had not had a financial effect on the company.

This provision is also deemed to have come in to effect on 27 April 2020 and if the court has already made a winding up order on the basis the company is unable to pay its debts, it is to be treated as void.

Therefore, any liquidators of companies pursuant to orders made after 27 April should seek advice regarding their positions.

Consequential amendments are made to the winding up process, namely: requiring evidence concerning the petitioner's belief, when the creditor should advertise, and access to the court file.

Finally, to allow companies subject to a petition presented in the relevant period to continue trading without worrying about s.127 post-petition dispositions, the bill moves the commencement of the winding up from the date of the petition to the date of the order.It then makes numerous (complicated) consequential changes to the "relevant time" for antecedent transactions and other look back provisions.

If you have any concerns or questions about the Corporate Insolvency and Governance Bill and its effect on your business, Fieldfisher's restructuring and insolvency team would be happy to assist.
 

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