Corporate Insolvency Regime: New Act gives companies more time and protection to pay debts
The Corporate Insolvency and Governance Act ("the Act") received royal assent on 25 June 2020. It is likely to have a number of implications for rural businesses, which either trade through companies, or who regularly contract with corporate entities.
The Act introduces a number of new measures aimed at preventing a large increase in corporate insolvencies. The key measures are as follows:
- Introduction of a new standalone moratorium on creditor actions;
- Suspension of wrongful trading provisions;
- Introduction of a new restructuring process which binds secured and unsecured creditors; and
- Restrictions on statutory demands and winding-up petitions.
In this article, we will consider each of these measures in brief.
Where a company is in financial difficulty and is struggling with the competing demands of multiple creditors, the company can benefit from a moratorium (ie a stay) on creditor actions in order to sell its business, obtain new funding or restructure. Until now, if a company needed the breathing space afforded by a moratorium, it was forced to enter administration. This is an extreme solution as it usually involves taking control of the company away from the directors and incurring considerable costs in relation to the administrators' fees and expenses.
The moratorium introduced by the Act involves an insolvency professional acting as a monitor, with oversight only, leaving directors in control and reducing costs. The moratorium is available to companies who are, or are likely to become, unable to pay their debts, but only if the company can likely be rescued during the moratorium and the company is still able to pay rent, wages and the monitor's fees, as well as any new debts accruing during the moratorium. Other debts will become subject to a payment holiday, and creditor actions in relation to these debts will be extremely limited.
To obtain a moratorium, the directors of the company will generally only need to file the relevant documents at court, including a statement from the monitor that it is likely the company can be rescued during the moratorium. The moratorium comes into force on the date the documents are filed and ends after 20 business days unless extended or brought to an end by the monitor. The monitor can bring the moratorium to an end if they think that the company no longer meets the requirements of the moratorium or if the aim of the moratorium has been achieved. The moratorium can only be extended in certain circumstances and may require the consent of the company's creditors or of the court.
The introduction of the moratorium is good news for struggling businesses who have a credible and deliverable rescue plan but need some breathing space to deploy this. On the other hand creditors (other than landlords and employees) relying on payments made from such companies may be dismayed to see the introduction of a further means by which debtors can further delay what could be long overdue payments.
Under the current wrongful trading rules, a director of an insolvent company can be liable to make a contribution to a company's assets if, sometime before the commencement of the administration or winding up of the company, that director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvency. The starting point for determining the level of compensation is to consider how much worse off the company is as a result of the wrongful trading.
The Act provides that, in determining the level of contribution as a result of wrongful trading, 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 between 1 March 2020 and 30 September 2020.
Whilst the relaxation of the rules will be welcomed by directors of rural businesses, those at the helm of struggling companies would nonetheless be wise to proceed with caution and take appropriate advice. Directors remain liable for any loss caused by wrongful trading outside of the relevant period and remain subject to a panoply of other fiduciary and statutory duties, which they risk breaching, where the company is on the verge of insolvency.
These measures in the Act provide for a company suffering, or likely to suffer, financial difficulties to enter into a restructuring plan to deal with the effects of those financial difficulties, provided it is approved by 75% by value of each class of creditors. Even if a class of creditors does not provide the necessary approval, the plan can be sanctioned by the court in certain circumstances. Subject to conditions, all creditors and shareholders will be bound by the plan, even if they did not vote for it.
In order to put a restructuring plan in place, an application must be made to the court to summon a meeting of creditors and shareholders to approve the plan. An application must then be made to the court to sanction the plan.
Restrictions on Statutory Demands and Winding Up Petitions
Usually, creditors owed more than £750 by a company, are able to serve a statutory demand requiring payment within 21 days. If the demand goes unsatisfied, the creditor can use this as a basis to put the company into liquidation, by presenting a winding-up petition. Statutory demands can, therefore, be used as a relatively cheap and simple means of exerting considerable pressure on debtors.
The Act provides that no winding up petition can be presented on the basis of a statutory demand served between 1 March 2020 and 30 September 2020. This essentially takes any potency out of statutory demands as a means to put pressure on corporate debtors. No equivalent restriction in relation to individuals has yet been announced.
Whilst winding up petitions can still be presented on grounds, other than that a statutory demand has not been satisfied, such petitions cannot be presented unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company or that the relevant ground would apply to the debtor, even if coronavirus had no financial effect on the debtor.
These provisions go considerably further than the government announcement of a measure to protect tenants in the retail and hospitality sectors against aggressive landlords. Whilst the measures provide some breathing space for companies struggling to repay debts, it does deprive creditors of a very useful tool in their debt recovery arsenal.
In summary, the Act provides some respite and further options for companies struggling with debt, amidst the government lockdown. However, this relief is likely to have a knock-on effect on other businesses, which are relying on payments being made by corporate debtors.