The Corporate Insolvency and Governance Bill: measures and background
03 June 2020
On 20 May, the Government published its Corporate Insolvency and Governance Bill. Once this Bill has become law, it will introduce the biggest reforms to the UK's insolvency framework for almost twenty years, as well as a series of temporary changes to the corporate governance requirements for companies and other entities.
We have been calling for corporate insolvency framework reform since 2016. We're pleased that, despite the circumstances, these changes are now almost a reality, and hope they will support the profession's efforts to help businesses navigate the enormous economic damage the pandemic is causing, as well as helping to evolve the UK's already world-recognised insolvency and restructuring framework.
Set out below is a brief overview of all the main measures outlined in the Bill. R3 will be producing further, and more detailed, analysis in the weeks ahead.
The moratorium - a concept which has been in development since 2016 - will give struggling businesses a 20-business day opportunity to consider a rescue plan, extendable by the directors for a further 20 business days or with creditor consent up to a year. The company will remain under the control of its directors during the moratorium, and no legal action can be taken against a company during this period without leave of the court. The process will be overseen by a monitor who must be a licenced insolvency practitioner.
We're pleased to see that this measure is available to insolvent firms. It was only available to solvent ones under the previous plans, and this would have excluded a huge number of businesses that will need to be helped through this crisis.
It's also positive to note that the monitor overseeing this process must be an insolvency practitioner, rather than 'any professional' as stated in the previous version of this proposal, as this amendment will ensure someone with insolvency and restructuring experience will be able to support the business' owners throughout the process
We've campaigned hard on both of those points and are pleased to see that our thoughts have been taken on board by the Government.
The new Restructuring Plan will closely resemble the existing English 'Scheme of Arrangement'. The measure will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue option for companies that are suffering financially. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.
It will introduce 'cross-class cramdown' which will allow for dissenting classes of creditors (those creditors that vote against supporting the restructuring plan) to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.
Termination clauses (essential supplies)
Often, when a company enters an insolvency procedure, suppliers of essential services or products can withdraw their supply, which can in turn prevent the successful rescue of a business.
The Bill introduces a permanent change to the use of these kind of clauses (known as 'termination clauses') in contracts for these suppliers. This will mean that, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, the company's suppliers will not be able to rely on contractual terms to 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 insolvency process, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.
The measure also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency.
This Bill introduces temporary provisions to void statutory demands made between 1 March 2020 and 30 June. The Bill will also restrict winding up petitions from 27 April 2020 to 30 June 2020. These temporary measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19.
Suspension of Wrongful Trading
The Bill will temporarily relax the threat of personal liability for wrongful trading from company directors while they make their best efforts to continue to trade during the timeframe associated with the initial period of the COVID-19 pandemic (1 March to 1 June 2020). However, the measures contained in the Bill do not provide a blanket suspension of the wrongful trading provisions.
Directors may not be liable to contribute to the losses in this period, but losses incurred in the periods before and after COVID-19 still remain a factor, and directors may still be subject to action for other breaches of duties during the COVID-19 period.
Annual General Meetings (AGMs) and general meetings (GMs)
The Bill temporarily allows those companies that are under a legal duty to hold an AGM or GM to hold a meeting by other means - even if their constitution would not normally allow it. As a result, directors will not be exposed to liability for measures that need shareholder endorsement, and shareholders' rights are preserved.
The measures relating to company meetings are intended to be retrospective from 26 March so that any company that has already had to hold an AGM in a way that adhered to social distancing measures, but that as a result did not meet relevant obligations in its constitution, will have done so in accordance with the law. Companies forced to postpone AGMs which were due to be held after 26 March will be given a limited period after the Bill is passed to hold those AGMs using the new flexibilities.
The measures will not prevent shareholders from exercising their right to vote on resolutions or other matters brought before the meeting, though they may be prevented from voting in person (rather than by post or by electronic means).
Extensions of filings
The Bill enables the Secretary of State to make regulations to extend deadlines for three types of filing: accounts; confirmation statements (including event-driven filings that are required to be submitted in advance of the confirmation statement) and registrations of charges.
This measure is intended to reduce pressure on companies that are currently unable to meet their filing deadlines as a result of COVID-19 related disruption.
A long campaign
Our campaigning on these reforms began back in 2016. Since then, we've responded to consultations, written to MPs, met with parliamentarians and officials, briefed journalists, and liaised with a range of stakeholders to ensure that the views of the profession are heard and considered as this legislation has been developed.
More recently, we've had a number of discussions with officials around this Bill. We have welcomed the opportunity to do this, are pleased that some of our feedback has been taken on board, and will be continuing these discussions as the Bill continues its journey to Royal Assent.
We appreciate that in producing this piece of legislation, the Government is attempting to complete a process which usually takes more than year in a few weeks, which makes the job of reviewing the draft Bill involved even more important. Officials are keen to hear about any issues or concerns, so please do let us know if you have queries over anything in the legislation. The profession's views have been crucial to our campaign for these reforms since we began campaigning for them in 2016 - and they will continue to be as the Bill moves towards completing its legislative journey over the coming weeks.
If you have views on any of the measures contained in the Corporate Insolvency and Governance Bill, please email James Jeffreys, R3's Senior Press, Policy and Public Affairs Manager at [email protected]
R3 members can provide advice on a range of business and personal finance issues. To find an R3 member who can help you, click below.