Corporate Insolvency and Governance Act 2020
Temporary Changes to the Insolvency Legislation
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Against the background of the Covid-19 pandemic the government has rushed through a raft of changes to current UK insolvency legislation in the Corporate Insolvency and Governance Act 2020 which received Royal assent on 25 June 2020. The Act makes some temporary changes to the existing Insolvency Act 1986 provisions which are directly aimed at business interruption issues during the lockdown. However, the Act also introduces new insolvency provisions, notably a new statutory “stand alone” Moratorium to allow a business breathing space without going into an insolvency process and a new Restructuring Plan which is targeted at saving a company not just its business. For the permanent changes please see our note ‘Corporate Insolvency and Governance Act 2020: Permanent Provisions’.
1. Suspension of Wrongful Trading Provisions
We should all be familiar with the concept that a director may be personally liable to contribute to the assets of an insolvent company, if they allow that company to continue trading in circumstances when they knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration, and after that point they failed to take every step possible to minimise losses to creditors. In effect, the provisions are compensatory in that a director who is found to have contravened the Wrongful Trading provisions may be required to contribute to or make good any resulting deficiency to creditors.
It is important to recognise that these provisions still apply in a situation where the financial position of a company or its creditors worsens during the period from 1 March 2020 until 25 July 2020. However, the Act provides that the court is to assume that the director is not responsible for the worsening of the financial position of the company.
Directors should however note that the provisions of the Act do not affect the statutory duties of a director under the Companies Act 2006 or their fiduciary duties. With a substantial risk that lockdown will be followed by a deepening period of recession company directors need to be on top of their legal duties and where appropriate take essential steps, including taking advice, to protect their position.
2. Statutory Demands and Winding Up Petitions
The Act includes temporary provisions to restrict Statutory Demands and Winding Up Petitions issued against companies during the pandemic where the debt is unpaid for reasons related to Covid-19.
A petition cannot be presented by a creditor during the period beginning with 27 April 2020 until 25 July 2020 except where 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 not had a financial effect on the debtor.
What amounts to a “financial effect”? It is anticipated that this is a low threshold. Coronavirus had a “financial effect” if the debtors’ financial position worsens in consequence of, or for reasons relating to, Coronavirus.
Similarly no petition for the winding up of a company can be presented on or after 27 April 2020 based on failure to comply with the statutory demand, if the relevant statutory demand was served during the period beginning on 1 March 2020 and ending on 30 June 2020.
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