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Insolvency petitions suspended until September 30th 2020

**UPDATED: TIME PERIOD FOR STATUTORY MORATORIUM AND TERMINATION CLAUSES FOR SMALL SUPPLIERS NOW EXTENDED FROM 30TH SEPTEMBER TO 30 March 2021**

The Corporate Insolvency and Governance Bill which received Royal Assent on 25 June 2020 has come into force as the Corporate Insolvency and Governance Act 2020, with effect from 26 June 2020.

The headline provisions of the new legislation are:

New statutory moratorium

This is available to companies and LLPs that are, or are likely to become, unable to pay their debts, but where it is considered likely that a moratorium would result in the company/LLP being rescued as a going concern.  The moratorium is for an initial period of 20 business days (calculated from the business day after the moratorium has come into effect).  This initial period can be extended by a further 20 business days by the directors (without any involvement of creditors). The moratorium can be further extended for a period up to one year (in total) with the consent of creditors, or a longer period if ordered by the court. 

The moratorium is a debtor in possession remedy: it leaves the directors in control of the company throughout the moratorium, but requires the appointment of a licensed Insolvency Practitioner to act as a monitor, carrying out a monitoring role throughout the duration of the moratorium.

It is considered that the moratorium is most likely to be appropriate for entities that are typically resilient, but have accrued unpaid liabilities and are facing creditor pressure, but have sufficient cash to pay creditors day to day during the period of the moratorium.

New restructuring plan

The new restructuring plan is modelled on the existing scheme of arrangement (“Scheme”) provisions in the Companies Act 2006. The new restructuring plan is some ways capable of being described as the UK equivalent of Chapter 11 in the US.  It enables eligible companies to propose a compromise with creditors and/or members, or any class of them.  A plan will have the ability to bind secured creditors as well as unsecured creditors and this is a marked difference to the current Company Voluntary Arrangement. The procedural aspects are very similar to a Scheme with an initial court hearing to examine class composition of creditors, creditor meeting(s) to vote on the plan and finally a court hearing to effect sanction.  A class approves the plan if 75% of creditors in value consent – there is no need for a majority of creditors in number in the class to vote in favour as well (referred to as the ‘numerosity test’ in Schemes).  The Court grants final approval to the plan but only if it feels the plan is just (fair) and equitable. 

The Court can confirm a plan even where a class of creditors has voted against it (which is referred to as cross-class cram down) and this is a significant difference from a Scheme.

Prohibition on suppliers terminating contracts in the event of insolvency pursuant to termination provisions in contracts (referred to as ‘ipso facto’ clauses)

Measures exist in the Insolvency Act 1986 (s233 and s233A) to prevent certain suppliers of essential services (utility companies etc.) from ceasing to supply whereby the only reason for doing so is the company's insolvency and where the continued supply will be paid for during the insolvency. 

The Act contains new provisions that will preclude all suppliers from ceasing to supply a company due to it becoming subject to insolvency proceedings if the supplies continue to be paid for. This includes the new restructuring plan/ moratorium in addition to the existing insolvency procedures. 

Suppliers will also be prevented from amending current/existing contractual terms in an attempt to impose increased payment terms/ limits.  Suppliers can be protected if, by continuing to supply, hardship is caused to their businesses. It remains to be defined exactly what is meant by hardship, and this may well be left to the courts to establish. A temporary exclusion for “small suppliers” has been included where they have supplied services to an entity and that entity has entered into insolvency proceedings in the one month period immediately after the date the Act comes into force.  To fall within the meaning of a ‘small supplier’, the supplier will need to meet two of the following three criteria:-

  1. The average number of their employees was not more than 50
  2. They have a balance sheet with assets totaling £5.1 million or below, and
  3. They have a turnover of £10.2 million or below.

Temporary COVID-19 provisions

Prohibition on presentation of winding-up petitions

No petition for the winding up of a registered company can be presented under s124 of the Insolvency Act 1986 on or after 27 April 2020 on the ground specified in paragraph (a) of s123(1) of that Act, where the demand referred to in that paragraph was served during the “relevant period”, which is defined as the period from 1 March 2020 to 30 September 2020.  Similar provisions apply to petitions in relation to unregistered companies.

Moreover, a petition cannot be presented by a creditor during this period on other evidence of inability to pay debts, unless the creditor has reasonable grounds for believing that coronavirus has not had a financial affect on the debtor or that the debt issues would have arisen anyway, for example, the debtor would have been unable to pay its debts even if coronavirus had not had a financial affect on the debtor.

Suspension of wrongful trading provisions

A director will be assumed by the court to not be responsible for worsening the financial position in the “relevant period” (defined as from 1 March 2020 to 30 September 2020).  Liquidators and administrators will therefore be unable bring claims for wrongful trading against an insolvent company’s directors for any losses caused by trading during this period.  However, directors' duties to their creditors during the period continue and it will not prevent liquidators and administrators bringing claims against directors for breaches of such duties.  The suspension will not apply to directors of most financial institutions such as building societies, credit unions and insurance companies.   

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