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The Corporate Insolvency and Governance Act 2020 was introduced on 26 June 2020. The Act is designed “to make provision about companies and other entities in financial difficulty; and to make temporary changes to the law relating to the governance and regulation of companies and other entities.” The Act was fast tracked through Parliament so that temporary measures could be introduced to give companies breathing space to deal with the fallout of the pandemic lockdown.
The Act applies in Northern Ireland, England and Wales and Scotland and focuses on temporary measures needed arising from the pandemic as well as permanent measures which have been in the making since 2018.
Below we have set out an overview of temporary and permanent changes:
What is wrongful trading?
Wrongful trading arises where a company continue to trade after the point at which the directors:
From 1 March 2020 up to 30 September 2020, the Act reduces directors risk of liability for wrongful trading should a company enter into insolvency proceedings as a result of the coronavirus pandemic (“the Pandemic”). When assessing if directors should contribute to the assets of a company in respect of the “worsening of the financial position of the company or its creditors” between these dates, the court is to assume that the director was not responsible for worsening the company’s financial position during the Pandemic, and disregard any losses incurred during that period. Although this suspension offers a defence of rebuttable presumption in favour of directors when considering claims of wrongful trading, all other director duties provisions continue to apply.
From 1 October 2020 this protection is no longer afforded by the Act to directors. Directors will need to be mindful of any risk that they knew or ought to have known that the company is unlikely to avoid insolvent liquidation should they continue to trade.
Following appointment, an Insolvency Practitioner can bring a claim for wrongful trading during the period prior to 1 March 2020 but actions taken after this date up to 30 September 2020 are excluded. Wrongful trading claims can be brought from 1 October 2020.
2. Restrictions on issuing Statutory Demands and Winding Up Petitions
If a winding up petition is presented on foot of a Statutory Demand made between 1 March 2020 and 30 December 2020 against a company who cannot pay its debt, the petition will be void unless the petitioner can show that the Pandemic has not negatively impacted the company’s finances or that the company would be unable to pay its debts even if the Pandemic had not occurred.
If a creditor served a statutory demand prior to 1 March 2020 they may present a winding-up petition if the creditor has reasonable grounds for believing either that:
This stay on proceedings allow companies breathing space from being aggressively pursued by creditors during the Pandemic
3. Meetings and Filings
The Act temporarily eases company filing and meeting requirements up to 30 September 2020.
Where a company is under a duty to hold an annual general meeting between 26 March 2020 and 30 September 2020 an extension has been granted to 30 December 2020. The Act gives the Secretary of State powers to reduce or extend this period, but he may not extend it beyond 5 April 2021.
The Act includes provisions to facilitate online meetings. The temporary amendment provides flexibility to companies holding virtual meetings. The AGM does not need to be held at any particular place and those attending do not have to be in the same place. Any votes to be cast can be done “by electronic means or any other means.”
For filings due between 26 March 2020 and 29 September 2020 the Act extended the deadline to 30 September 2020 or 12 months from the end of the accounting period, of which is earlier. If the company’s filing deadline was between 26 March 2020 and 26 June 2020 and the company is in default for not filing accounts, the company may no longer be in default when the filing deadline is moved.
The Government introduced the Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020 (“the regulations”) on 27 June 2020. From 27 June 2020, more companies will get an extension to their accounts filing deadline if the date for filing falls any time from 27 June 2020 to 5 April 2021 (including these dates).
|Company type||Company has not had an extension or shortened their accounting reference period|
|Public limited companies (PLCs)*||Filing deadline extended from 6 to 9 months|
|Private company||Filing deadline extended from 9 to 12 months|
|LLP||Filing deadline extended from 9 to 12 months|
|Overseas companies who are required to prepare and disclose accounts under parent law||Filing deadline extended from 3 to 6 months|
|SEs*||Filing deadline extended from 6 to 9 months|
*For PLCs and SEs whose original accounts filing deadline fell on or after 30 June 2020 before it was extended by the Corporate Insolvency and Governance Act 2020, this extension will apply and supersede the extension under the Act.
These Regulations do not apply to Public companies and Small Enterprises whose original filing deadline fell before 30 June 2020 was extended to 30 September 2020 under the Corporate Insolvency and Governance Act 2020.
The aim of the Moratorium is to give a company breathing space from being pursued by its creditors so that it may consider restructuring options or secure new finance.
A company is eligible to seek a moratorium if it “is not subject to an outstanding winding-up petition, and is not an overseas company”. The Act sets out a list of companies that are excluded and should be checked before applying for a moratorium.
Eligibility criteria has been temporarily relaxed to allow companies to enter a moratorium if they have been subject to an insolvency process within the previous 12 months or if they are subject to a winding up petition. This temporary modification will be in place until 30 March 2021.
The directors of a company can apply to the High Court for a moratorium by lodging the relevant documents. The application must include a statement from the directors that they believe that the company is or is likely to be unable to pay its debts. Included is a statement from a Monitor (a Licensed Insolvency Practitioner) confirming that they agree to act and, in their opinion, a moratorium will result in the rescue of the company as a going concern.
Role of the Monitor
The role of the Monitor is set out in detail in the Act. The main role is to analyse the viability of the company throughout the process and determine if it can continue to trade as a going concern. Although the directors will remain in control of the daily business of the company, they have a duty to co-operate with the Monitor and provide them with information requested so they may fulfil their duties. Should the Monitor determine that rescue of the company as a going concern is no longer viable or that the company cannot pay its moratorium debts, they must bring the moratorium to an end by filing a notice at court.
The moratorium is for an initial period of 20 business days. Directors can extend the period by a further 20 days without consent of creditors. Any further extension will require creditors consent or, failing that, an application to extend can be made to court.
Protections during Moratorium Period
The Moratorium protects companies from:
The company cannot:
End of Moratorium
A moratorium will come to an end on:
Once the moratorium has come to an end it cannot be extended.
The Act introduces a new restructuring plan which applies to companies that are or are likely to experience financial difficulties which affect its ability to trade as a going concern. The Act inserts a new Part 26A into the Companies Act 2006 – Arrangements and Reconstructions for Companies in Financial Difficulties. Under these provisions, a restructuring plan can be proposed to creditors with a view to reaching a compromise or arrangement to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties. Approval requires at least 75% majority for each class in value.
Where a class has voted against the proposed restructuring plan, the company can ask the court to sanction the plan under Part 26A. Considerations will include:
If the court determines that the restructuring plan is more favourable to creditors than an alternative insolvency process, classes of creditors who voted against the plan are bound by the court’s sanction.
It is common for supply contracts to include a clause that allows the supplier to bring the contract to an end if the customer enters in to an insolvency process. The Act introduces a prohibition on suppliers exercising their rights under ‘ipso facto’ termination clauses where company has entered into an insolvency procedure, including the Moratorium.
Small business suppliers are excluded from this obligation should they need to stop supply to protect their business. This exemption applies until 30 March 2021.
These provisions aim to give the company a platform to try to rescue their business by ensuring goods continue to be supplied. The provision applies to companies that enter into insolvency processes permitted under the Insolvency (Northern Ireland) Order 1989.
Banks and financial service providers are exempt from exercising their rights to bring the contract to an end if a company enters an insolvency process. They do not have to continue to supply services agreed under the contract e.g. loan, overdraft.
Suppliers can apply to the court to be exempt if it threatens their solvency.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency & Business Restructuring team at Cleaver Fulton Rankin, Belfast for further advice or information.
 Article 13B Corporate Insolvency and Governance Act 2020