UPDATE ON TEMPORARY PROVISIONS


The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 (Extension Regulations) came into effect on 29 September 2020. Furthermore, The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020 (Termination Regulations) came into effect on 1 October 2020.  These Regulations modify a number of the time limits on temporary measures set out in The Corporate Insolvency and Governance Act 2020 (Act).

1. WINDING-UP / STATUTORY DEMAND RESTRICTIONS

WHAT HAS CHANGED? 

Schedule 10 of the Act contains various provisions aimed at preventing a significant number of winding up petitions from being issued. The relevant period under this schedule has been extended by s2(3) of the Extension Regulations. The relevant period now runs from 27 April 2020 to 31 December 2020

The change of date has implications including: 

  • no petition can be issued in the relevant period (27 April 2020 until 31 December 2020) based on a statutory demand served between 1 March 2020 and 31 December 2020;
  • no petition is to be issued during the relevant period unless the creditor has reasonable grounds for believing either (i) COVID-19 has not had a financial impact on the company; or (ii) the debt would have arisen even if COVID-19 had not had an impact on the company;
  • for petitions presented between 27 April 2020 and 31 December 2020, the deemed commencement date of any liquidation is the date of any order, and not the date of presentation of the petition.
  • for petitions presented after the Act comes into force, and before the 31 December 2020, the rules on advertisement are amended such that no petition shall be advertised until the Court determines whether it is likely to make a winding up order.

WHY?

This extension of the relevant period will give further breathing space to companies and prevent aggressive creditor action during the period when companies are continuing to be financially impacted by COVID-19. The extension of these measures mean creditors cannot rely on statutory demands to bring winding-up petitions, and are prohibited from filing winding up petitions where the company’s inability to pay is due to COVID-19. These provisions also run in parallel with restrictions on landlords forfeiting business leases for non-payment of rent, or exercising CRAR (in England) until the end of December 2020.

2. SUSPENSION OF WRONGFUL TRADING PROVISIONS

WHAT CHANGED?

Clause 12 of the Act provided that the Court was to assume that the person was not responsible for any worsening of the financial position of the company or its creditors that occurred during the period from 1 March 2020 until 30 September 2020.  This allowed directors to operate without the threat of incurring personal liability, in a time when it would have been difficult for them to understand the impact of COVID-19 on the company. 

As of 30 September 2020 this provision has expired and the ordinary provisions on wrongful trading and personal liability, under s214 or 246ZB of the Insolvency Act 1986, shall apply. This means that directors will once again be potentially personally liable to contribute to the assets of the company where they allow the company to continue trading and they knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration, and failed to take every step possible to minimise losses to creditors, with a resultant worsening of the company's financial position.

3. MORATORIUM PROVISIONS 

WHAT CHANGED? 

The Act introduced a new moratorium procedure which allows a company to obtain a free standing moratorium to allow breathing space for them to consider rescue and restructuring options. This new moratorium is subject to certain temporary measures, some of which have now expired under the Termination Regulations. 

Schedule 4 of the Act allowed for the supervising insolvency practitioner to disregard aspects of the company's financial position that relate to COVID-19 when considering whether the company is "rescuable" for the purposes of obtaining a moratorium. Under s2 of the Termination Regulations, as of the 30 September 2020 this provision has expired. As such, only companies deemed to be rescuable, inclusive of considerations of the impact of COVID-19 on the company, by the insolvency practitioner will be able to access a moratorium. 

Additionally, under s2 of the Termination Regulations the relaxation of conditions for extending, monitoring and terminating the moratorium on the grounds that any worsening of the company's financial position due to COVID-19 should be disregarded, also expired on 30 September 2020

WHY?

Parliament's rationale behind dis-applying the provisions which allow insolvency practitioners to disregard the impact of COVID-19 on a company, is to minimise the risk of increasing numbers of companies who continue to operate with no real prospect of servicing and repaying their debts. The explanatory guidance on the Termination Regulations sets out the view that to allow the implications of COVID-19 to continue to be disregarded by insolvency practitioners, could hinder restructuring of the wider economy and lead to further damage to creditors and suppliers. 

4. FLEXIBILITY TO HOLD AGMS VIRTUALLY 

WHAT HAS CHANGED? 

Schedule 14 of the Act allowed for AGMs of companies to be held virtually, originally from the period of 26 March 2020 to 30 September 2020. The Extension Regulations at s2(4) has now extended this period to the 30 December 2020. 

This provision permits that company meetings: 

  • need not be held at any particular place;
  • may be held, and any vote may be permitted to be cast, by electronic means or any other means;
  • may be held without any number of those participating in the meeting being together at the same place.

WHY?

This extension will be important for companies to allow them to still conduct meetings when there are many restrictions across the UK limiting the number of people who are able to meet in person. By allowing AGMs to be attended virtually, it will allow companies to continue to work and hold meetings whilst obeying strict social distancing laws. 

5. TERMINATION CLAUSES – SMALL SUPPLIERS EXEMPTION

WHAT HAS CHANGED? 

Under s2(2) of the Extension Regulations, the small-supplier exemption from the termination clause prohibition is extended to 30 March 2021

This means that, until 30 March 2021, small-suppliers will be allowed to terminate a contract for the supply of goods or services if the other party has entered into an insolvency process.  

WHY?

This extension will mean that small-suppliers will remain protected in a time when suppliers will be continuing to be financially impacted by COVID-19.


 

Key Contacts

Kirsten Fleming

Kirsten Fleming

Managing Associate, Restructuring
Edinburgh, UK

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Andy Bates

Andy Bates

Partner, Restructuring
Leeds, UK

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