Update of The Insolvency BillJul 02, 2020
We previously discussed the Government’s intention to relax the rules surrounding Insolvency. On the 20 May 2020, the Government introduced the Corporate and Insolvency Governance Bill. As with most of these type of documents, they’re not the easiest of bedtime reading! We therefore wanted to let you have a much easier to read update of The Insolvency Bill.
The Bill proposes a range of amendments to existing legislation. These are all intended to help businesses survive these unprecedented times. Below we discuss the key points, and provide an update of The Insolvency Bill.
Companies will be able to apply for a 20 day moratorium period from the court. To benefit, a company will need to be able show that the business cannot meet its liabilities. They will also need to demonstrate that a moratorium period would allow it to continue to trade.
In short, the moratorium period suspends a range of actions that otherwise may be taken against the Company by creditors. The option will exist for directors to apply for an extension to the initial 20-day period.
Whilst the moratorium will go some way to protecting the business, companies will be subject to a range of restrictions. These will include restrictions on obtaining credit, entering into contracts, paying debts and disposing of property. Whilst this will be appealing to some, it’s important that directors fully understand the effects and restrictions imposed.
Currently, a company director who allows a company to continue to trade in the knowledge that it will be unable to repay its debts may be liable for wrongful trading. They may also be ordered to personally contribute towards the assets of the company. The Bill suspends this offence. The court will assume that the director is not responsible for the worsening of the company’s financial position between 1 March 2020 and 30 June 2020 or one month after the Bill is passed. As with most of the provisions, there are exclusions contained within the bill.
This will be a welcome amendment for directors. It alleviates the pressures of trading where a company is insolvent. It also prevents them from being guilty of an offence and the risk of being ordered to personally contribute to the company’s assets.
Contracts for supplying goods and services will often contain a contractual term that the contract is automatically terminated, where the party being supplied is insolvent. The Bill will prevent suppliers from terminating the contract by reason of a company’s insolvency or past breaches of contract. Suppliers will have to continue supplying even if there are arrears that existed prior to the company’s insolvency. This may, of course, present acute issues for suppliers, who may be experiencing their own cash flow difficulties. Suppliers can apply to the court to terminate the contract. They will be required though, to show that continuing to supply to the company will cause hardship.
The Bill does include restrictions and, in limited instances, a contractual termination clause will remain valid. This can be exercised where a company becomes insolvent.
The Bill introduces a further restructuring procedure as an addition to the mechanisms already in place. For example, Company Voluntary Agreements.
Typically, before a compromise agreement can be entered into, at least 75% of creditors of the same class must vote in its favour. Under the Bill, the Court has powers to approve a compromise agreement. This is even where a class of creditors have not voted in favour. However, the court will only allow such an agreement where it is just and equitable; the court will need to be sure that the class of creditors who do not agree would not be any worse off than they would be otherwise.
Statutory Demands and Winding Up Petitions
The Bill also includes provisions on winding up petitions against both registered and unregistered companies.
Whilst there are limited exceptions, the Bill will prevent a winding up petition being presented, after 27 April 2020, against a registered or unregistered company where a statutory demand has been served between 1 March 2020 and 30 June 2020, or one month after the Bill is implemented. Issuing a statutory demand is often the first steps towards insolvency and this provision is designed to prevent creditors penalising companies for the effects of the lockdown.
Under the Companies Act 2006, companies are required to file a number of documents within a prescribed time limit. The Bill enables the Secretary of State to extend the deadline for filing at Companies House, the extension is known as the “substituted period”. Under the Bill a substituted period must not exceed: –
- 42 days where the original filing deadline is 21 days or less; and
- 12 months where the original filing deadline is 3,6 or 9 months.
All in all, the changes set out under the Bill appear, in our view, to offer companies breathing space whilst working through these unprecedented times.
The Bill was passed as a piece of legislation on the 25th June 2020. .
We would welcome the opportunity to discuss your own businesses needs and how we may be able to assist with issues addressed by this update of the Insolvency Bill.