Corporate Insolvency and Governance Bill could be a lifeline to businesses

Coodes Solicitors commercial disputes lawyer Abi Lutey welcomes the draft Corporate Insolvency and Governance Bill, which includes proposed legislation to help businesses that are at risk of going insolvent during the Covid-19 crisis.

The Corporate Insolvency and Governance Bill was introduced to Parliament on 20 May and is due to have its second hearing on 3 June. If passed, the bill will make important changes to existing corporate law surrounding business insolvency and corporate governance.

The proposed legislation is designed to protect businesses that are at risk of becoming insolvent as a result of the impact of the coronavirus crisis. Business groups, including the FSB and Institute of Directors, have expressed their support for the draft bill, which could offer a lifeline to those businesses that have been most seriously impacted by the crisis.

What is the purpose of the Corporate Insolvency and Governance Bill?

The draft bill outlines measures to amend insolvency and company law. It is designed to support businesses and help them to address some of the challenges they face from the impact of the coronavirus pandemic. The changes would be temporary, to reduce the pressure on businesses as they go through a period of instability. Ultimately, the bill is designed to help viable businesses survive through a very challenging time.

While much of the legislation focuses on supporting businesses at risk of failing, it also includes the relaxing of some burdens on all businesses and not-for-profits, such as the requirement to hold Annual General Meetings (AGMs) by a strict deadline.

What are the key changes in the draft legislation?

The proposed legislation includes the following:

1. The introduction of a new moratorium for eligible companies, which would have the effect of providing an initial 20 business days’ period in which the company could be rescued as a going concern. The moratorium would give the company a payment holiday for specified debts, as well as restrict creditor action and enforcement, whilst imposing controls on the company entering into certain transactions. The moratorium and the company’s actions during it would be subject to oversight by a qualified insolvency practitioner to prevent abuse.

2. The protection of supplies of goods and services during the relevant insolvency procedures by restricting both termination and variation of any contracts which existed prior to the insolvency procedure being used. Furthermore, suppliers will not be able to exercise other termination rights that have arisen (but have not yet been exercised) prior to the relevant insolvency proceedings. The Bill makes provision for relaxation of the restrictions where these would cause hardship to the supplier and, for a limited period, small suppliers.

3. The introduction of a new restructuring plan for suitable companies.

4. A number of temporary easements, including;

• Limitation of personal liability for wrongful trading of directors of eligible companies, who are to be assumed not to be responsible for any worsening of the financial position between 1 March 2020 and 30 June 2020 or one month after the Act coming into force (the Relevant Period).
• Prohibition on the presentation of winding up petitions on or after 27 April 2020 based on a statutory demand served during the Relevant Period and further restrictions on presentations of winding up petitions during the Relevant Period unless the COVID-19 pandemic has not had a financial effect on the company.
• Provision for remote meetings of companies and other bodies to be held in light of social distancing measures.
• Extension of filing periods for certain filings with the Registrar of Companies.
• The possibility of temporary relaxations of the eligibility requirements for the new moratorium.
• Provision for further regulation, in the period to 30 April 2021, if required to mitigate the effects of COVID19.

What difference would the legislation make to businesses?

If it passed, the bill will temporarily suspend some of our existing insolvency law. Put simply, it will enable some businesses to enter administration giving them a chance of survival, rather than going into liquidation. It will offer those businesses protection against the threat of personal liability and penalties from creditors and will remove some of the potential liabilities that Directors can face personally upon the liquidation of their business.

While this is likely to be welcome news to most of the business community, the proposed legislation could have a negative impact on creditors, such as lenders and property landlords and the legislation will need to consider how best to protect their position.

I look forward to seeing how the bill is received by Parliament on 3 June.

For more information on this issue, contact Abi Lutey Head of Coodes’ Commercial Disputes team on 01872 246200 or abi.lutey@coodes.co.uk