02 Jul 2020

On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (the "CIGA") came into effect. As anticipated in our previous article the CIGA was fast-tracked through Parliament and some amendments were ultimately made prior to it becoming law. While these amendments were not substantive, there are some key changes/clarifications between the first draft and the enacted legislation which we expand upon below.

Temporary changes are extended to 30 September 2020

The temporary COVID-19 specific special measures outlined in our article have been extended to 30 September 2020. As a recap, the temporary measures are as follows:

Wrongful trading

Personal liability for wrongful trading has been suspended temporarily with retrospective effect from 1 March 2020 to 30 September 2020. The suspension of liability means that, in determining liability of a person for wrongful trading, (i.e. the contribution (if any) which a person may be required to make to a company's assets) the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period. Of particular note here is that is has been confirmed that it is the intention that this assumption is not rebuttable.

This change should actually make little practical difference as regards board decision making in circumstances of financial distress. This is because other directors' duties remain in effect, in particular the duty to act in the best interests of creditors where a company is of doubtful solvency. Our previous commentary on this can be found here.

Statutory demands and winding up petitions

  • No petition for the winding up of a company can be presented on or after 27 April 2020 on the ground that the company has failed to satisfy a statutory demand if it was served during the period 1 March 2020 to 30 September 2020
  • No petition for the winding up of a company can be presented by a creditor on or after 27 April 2020 until 30 September 2020, unless 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. Recent cases have suggested that it is relatively easy for a debtor to show that coronavirus has had a financial effect on it, but difficult for a petitioning creditor to prove that it would have been unable to pay its debts regardless
  • As there can be few businesses in the UK that the pandemic has not had some effect on, this may amount to an almost blanket prohibition on winding up until the end of September. However, as lockdown continues to ease, It will be interesting to see how the position on what constitutes 'financial effect' develops. Our previous commentary on this can be found here
  • From a landlord/tenant perspective these changes complement the current restrictions on landlords seeking recovery for non-payment of rent, namely:
    • section 82 of the Coronavirus Act 2020 (as amended) restricting a landlord's right to forfeiture for non-payment of rent to 30 September 2020
    • the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 which prevents landlords from using the commercial rent arrears recovery (CRAR) process unless an amount equal to at least 189 days’ rent is overdue.

Permanent changes

Free-standing moratorium

Accelerated lender debts in a moratorium will not obtain 'super priority'

The bill as originally drafted stated that debts incurred during the period a company was subject to a moratorium would be treated as priority debts in the event of a subsequent insolvency process. This would have meant that if a lender accelerated its debt during the moratorium it could have obtained this so called 'super priority' (i.e. they would have been paid ahead of the insolvency practitioners expenses and remuneration in a subsequent insolvency process if entered into within 12 weeks from the ending of the moratorium).

Following debate in the House of Lords, the compromise agreed was that debt could still be accelerated while a company is subject to a moratorium but would not obtain 'super priority' save that payments that would have fallen due in any event during the moratorium would receive priority as a debt of the moratorium.

If a lender does accelerate its debt, then it would become more difficult to maintain that it is likely that the company is likely to be rescued as a going concern. This would leave any monitor that wishes to avoid terminating the moratorium in a difficult position, and could in the right circumstances give a bank the ability to force the end of a moratorium, where it lacks the strict legal right to do so.

Additional role for the Pension Protection Fund (PPF) and the Pensions Regulator (TPR)

Following significant lobbying from the Pensions sector, the bill was amended to redress the balance in favour of trustees (as a creditor) of company pension schemes. This was achieved by giving TPR and the PPF (if appropriate) rights, amongst other things, to receive notification and information in relation to the moratorium and restructuring plan where a company sponsors an occupational pension scheme usually those providing defined benefits.

Other points to note

Some other key points to note are as follows:

  • Other business structures: A further statutory instrument has been introduced to make the moratorium available for limited liability partnerships and charitable incorporated organisations, with co-operative and community benefit societies expected to follow
  • Pre-packs: The Secretary of State's power to make provision to prohibit or impose requirements on the disposals of property to connected parties pursuant to the Small Business, Enterprise and Employment Act 2015 expired on 26 May 2020. These powers gave the Secretary of State the power to make it a requirement that pre-pack administration transactions with connected parties be referred by such parties to the pre-pack pool for approval prior to completion. This remains voluntary at present with no sanctions for non-compliance. The CIGA reintroduces the Secretary of State's aforementioned powers noting however, that these powers must be used before the end of June 2021. The door has accordingly been kept open to further debate the utility of the pre-pack pool in the future.

Conclusion

UK companies face twin cliff edges in the Autumn, with wrongful trading and winding up petitions set to return to an economy with huge amounts of overdue corporate debt on 1 October, and the Coronavirus Job Retention Scheme due to end at the end of that month.

As with the nation at large, the route out of economic lockdown may prove more difficult than the way in.

So, it is to be welcomed that the provisions introduced by CIGA strengthen what is already a world-leading set of insolvency tools to help businesses mitigate the economic impact of the coronavirus pandemic. Whilst ideally these changes would not have been brought in during a pandemic given the need for restructuring and insolvency professionals to get to grips with the new tools at their disposal, they will undoubtedly play a vital role in helping businesses restructure as the lockdown continues to ease and the economy starts to recover. Unprecedented times call for unprecedented measures.