The Corporate Insolvency and Governance Act (“the Act”) became law on 26 June 2020. (Read our previous update on the Act here). As has been widely discussed, the Act introduces new corporate insolvency rescue procedures as well as temporary and permanent insolvency and corporate governance measures.
The Act is the most significant reform of the UK’s corporate insolvency and restructuring law in over 20 years. Some of the reforms implemented are traceable to the government’s insolvency and governance reform proposals in 2018, although the Act goes beyond the scope of these, partly due to the financial impact of the coronavirus pandemic on the economy and the government’s efforts to save viable businesses from being forced into compulsory winding up processed by creditors.
In particular, in response to the problems for businesses created by the pandemic and the government’s decision to prevent most businesses from trading, the government introduced measures to restrict temporarily the circumstances in which a winding up petition could be issued and to restrict the scope of a director’s personal liability for wrongful trading.
Statutory demands and winding up petitions
The restrictions on winding up petitions based on statutory demands were included in Schedule 10 of the Act. Broadly, they provide that a person cannot petition for the winding up of a company based on an unsatisfied statutory demand if that demand was issued during the period 1 March to 30 September (the relevant period) unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the company, or the relevant ground for winding up the company would apply even if coronavirus had not had a financial effect on the company.
Further, the Act also provides that where a winding order had already been made but would not have been made had the Act been in force, then the winding up order is itself void.
Suspension of wrongful trading
If a director is found liable for wrongful trading (that is, continuing to trade when the director knew or ought to have concluded that the company was or was going to become insolvent) then under the Insolvency Act 1986 the director may be ordered by the court to make a contribution to the company’s assets of such an amount as the court thinks proper. Section 12 of the Act makes an exception to this regime by providing that, in determining the contribution (if any) to a company’s assets that it is proper for a director to make, 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 period 1 March to 30 September 2020.
In practice this means that where a company has entered into insolvency between 1 March and 30 September it is likely that directors will not face wrongful trading claims where they can show that they only knew or concluded that the company was going to become insolvent during that period.
While an exception has been made for wrongful trading, all other potential claims (and offences) remain in force. As such, a director can still be found liable for fraudulent trading, or misfeasance, or be disqualified from being a director.
Extension of relevant period in respect of winding up cases
On 29 September 2020, the Secretary of State extended the length of the relevant period as regards statutory demands and the presentation of winding up petitions to 31 December 2020. The Secretary of State did not, however,extend the exception as regards wrongful trading.
What does this mean for businesses?
Creditors that are seeking to pursue winding up petitions on the basis of statutory demands are still prevented from doing so up until the 31 December 2020, except in cases where the debtor was balance sheet insolvent or in financial distress prior to Covid-19. The burden lies on the creditor to demonstrate this, and the potential difficulties involved in doing so, and the additional costs of doing so, may make it unattractive for creditors to pursue winding up claims before the end of the year.
It is open to the government to extend the period further if it feels that it is necessary to do so as the Act provides that the temporary measures can be extended for periods of up to six months at a time. It remains to be seen whether the further lockdown introduced in England on 5 November will come to an end on 2 December as stated or will be extended further, and whether the government will consider this a sufficiently significant interruption to extend the restrictions beyond the end of the year.
The extensions of the restrictions on winding up claims give businesses much-needed support during these difficult and uncertain times. Statistics recently published by the Insolvency Service show a drop of over a third in the number of insolvency appointments compared with similar periods in 2019.
Notably, the government did not decide to extend further the period during which directors could not be required to contribute to the company’s assets in a wrongful trading case. That seems to be inconsistent with the general policy around the original measure, which was to mitigate wrongful trading liability in a period when businesses could not operate as usual through government-imposed restrictions on trading. While the lockdown was removed well before the end of September, tiered restrictions have since been introduced which have caused similar problems for certain businesses in regions most impacted by coronavirus after the end of September.
Now we have entered another period of lockdown, and the end of the pandemic still appears some way off, concern is growing that the temporary measures are simply delaying the inevitable and that whether they are extended further or not, 2021 will see a slew of corporate insolvencies.
An overview of the UK’s Corporate Insolvency and Governance Bill 2020
You can register online or follow us on Twitter or LinkedIn to receive our latest news, events and publications.