Recent Changes to Insolvency Legislation to help UK businesses

Updated: Jun 4, 2020

Corporate Insolvency and Governance Bill 2020 (the Bill)

As a result of the COVID-19 pandemic the UK government has pushed through various changes to the insolvency reforms - some temporary, some we suspect will be more permanent. The Corporate Insolvency and Governance Bill is designed to help companies maximise their chances of survival, protect jobs and support the country’s economic recovery.

There are 8 measures included within the bill.

Company Moratorium

When a company is in financial difficulty it is sometimes impossible to get any breathing space to consider the options available to implement a rescue plan, such as Administration or Company Voluntary Arrangement. This perhaps contributes to vastly disproportionate number of voluntary liquidations in the UK when compared to the other available processes.

The Bill gives struggling business a formal breathing space to pursue a rescue plan. This means that no legal action can be taken against a company without leave of the Court. How this will work practically remains to be seen. The principal idea is that the moratorium is available to ensure companies which are struggling are given the opportunity to survive. It is suspected that the moratorium will be used in the preamble to a Company Voluntary Arrangement or Restructuring Plan.

Statutory Demands and Winding up Petitions (2 measures)

As a director of a company, there is perhaps nothing more worrying than receiving a statutory demand or a threat of a winding up petition. These are of course statutory routes that creditors can take to recover their unpaid debts. Unsurprisingly, the majority of winding up petitions in the UK historically have been issued by H M Revenue & Customs (HMRC). Since the start of the pandemic, HMRC have significantly reduced the number of winding up petitions as the number of companies with unpaid taxes rose significantly.

The Bill removes the threat of winding up petitions where the unpaid debt is due to Covid-19. It also introduces temporary provisions to void statutory demands issued against companies during the emergency. The idea is that businesses are given the opportunity to reach realistic and fair agreements with all creditors. Quite how the Court will determine if an unpaid debt is directly due to Covid-19 remains to be seen!

Suspension of Wrongful Trading

Earlier this month we published a blog article focusing on the relaxation of the wrongful trading provisions during the pandemic - Relaxation of wrongful trading provisions - but there are risks all directors should be aware of!

Ipso Facto (Termination) Clauses

Typically when there is an attempt to rescue a company, an insolvency practitioner must rely upon the co-operation of key suppliers. The ability to enforce the co-operation on utility providers and IT services as part of these processes has been available for a number of years. The Bill now ensures that as part of this rescue or insolvency procedure, the majority of suppliers cannot stop or threaten to stop supplying the insolvent company, regardless of the provisions within their supply agreements.

In practical terms, this means that any future supplies will be paid for by the company under the control of the insolvency practitioner. Any supplies not paid for will rank as an unsecured claim in the process. There are however provisions to relieve the requirements to supply if it causes hardship to the supplier’s business, as well as a temporary exemption for small company suppliers during the emergency.

Restructuring Plan

Alas, a new insolvency procedure! This procedure allows struggling companies to propose a plan to repay its debts over a specified period of time. The principal is very similar to a Company Voluntary Arrangement, with the key difference being that the vote on the Plan is to be considered by classes of creditors. If there is one dissenting class of creditor, the Court may force through a Plan that binds all creditors if it is fair and equitable and in the interests of creditors as a whole.

It is worth noting that this procedure should only be used by viable companies. The services of an insolvency practitioner will still be required to determine if the company is indeed viable.

Annual General Meetings (AGMs)

For many years the requirement for AGMs, or general meetings, has slowly faded away. However, there are still many companies, depending on their size, legal status or other legal requirements that still do hold AGMs in accordance with their constitutions.

As a direct result of the social distancing measures adopted in recent months (and likely to be in place for the foreseeable future), the Bill allows those companies and other bodies that are under a legal duty to hold an AGM, or general meeting, to hold a meeting by other means even if their constitution would not normally allow it.

Filing Requirements

As any company director or secretary will know, there are various statutory filing requirements during a company’s life that need to be adhered to. The late filing of documents, such as accounts and confirmation statements, usually result in fines imposed by Companies House.

Since the pandemic Companies House have provided tens of thousands of extensions to companies who have breached their filing deadlines. These extensions were limited to those legally allowed to be granted as dictated by statute. The bill temporarily allows further extensions to be granted by Companies House to allow companies to get back on track.

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