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. The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020 (Termination Regulations) then came into effect on 1 October 2020. Furthermore, The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No.2) Regulations 2020 (Second Extension Regulations) will come into force on 31 December 2020. These Regulations modify a number of the time limits on temporary measures set out in The Corporate Insolvency and Governance Act 2020 (Act).
SUSPENSION OF WRONGFUL TRADING PROVISIONS
WHAT HAS 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.
In light of the continuing impact that COVID-19 is having on many areas of business, through s2 of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020, the suspension of liability for wrongful trading has been re-instated to 30 April 2021. Now, in determining for the purposes of s214 or s246ZB of the Insolvency Act 1986 the contribution (if any) to a company’s assets that it is proper for a person 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 relevant period. The relevant period began on 26 November 2020 and will end with 30 April 2021.
The decision to re-instate protection from wrongful trading liability was made by the Government, taking account of the level of economic uncertainty currently faced by businesses. This included recognition of the effect of extra restrictions on businesses imposed by the various levels of lockdown restrictions throughout the UK and the imposition of further COVID-19 restrictions on businesses in some form on the run up to the essential Christmas trading time.
WHAT HAS 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.
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.
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) extended this period to the 30 December 2020.
This provision to allow AGMs to be held virtually has now been further extended to the 30 March 2021 by s3 of The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 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.
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.
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 had been previously extended by s2(3) of the Extension Regulations to 31 December 2020.
The winding-up and statutory demand restrictions have now been extended to 31 March 2021 by s2 of the Second Regulations.
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 March 2021;
- 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 (b) 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 March 2021, 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 March 2021, 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.
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.
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 provision means that small-suppliers are exempt from the rules under s233B of the Insolvency Act 1986. 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.
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.