New business support measures: Corporate Insolvency and Governance Act 2020
Research Briefing
Published Tuesday, 06 October, 2020
This Commons briefing provides an outline of the main measures of the new Corporate Insolvency and Governance Act 2020. The Act introduces permanent measures to update the UK insolvency regime, and temporary measures to give struggling businesses a lifeline during the current coronavirus crisis.
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Due to the current coronavirus pandemic many otherwise economically viable businesses are experiencing significant trading difficulties. The concern is that the disruption will give rise to a wave of business insolvencies.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) received Royal Assent on 25 June 2020. The Act consists of eight measures which conveniently fall into two sets: permanent measures to update the UK insolvency regime, and temporary measures to insolvency law and corporate governance, intended to give struggling businesses a lifeline during the current crisis. Almost all its provisions commence on 26 June 2020, save that most of the temporary business protection measures it enacts have retrospective effect from 1 March 2020.
On 24 September 2020, the Government announced that it would extend the duration of some (not all) of the Act’s temporary measures. The aim being to continue to provide a breathing space to companies whilst coronavirus related restrictions remain in place (including social distancing and regional lockdowns).
The permanent insolvency measures contained in the Act represent a major change to UK insolvency law and, in some ways, represents a shift toward a business rescue culture more in line with U.S. insolvency (chapter 11). The new permanent measures are:
- A new restructuring plan to help viable companies struggling with debt obligations. The court can only sanction a restructuring plan (that binds creditors) if it is “fair and equitable”. In other words, creditors vote on the plan, but the court can impose it on dissenting creditors (known as “cross-class cram down”).
- A free-standing moratorium for UK companies to give companies a formal “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium no creditor action can be taken against the company without leave (i.e. permission) of the court. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors (in effect, it is a “debtor-in-possession” procedure).Temporary modifications to the new moratorium procedure, which relax the entry requirements, have been extended until 30 March 2021. The temporary moratorium rules have also been extended to 30 March 2021.
- A prohibition on termination (or so called “ipso facto”) clauses that engage when a company enters an insolvency procedure, a moratorium or begins a restructuring plan. In effect, the Act prevents suppliers from stopping their supply while a company is going through a rescue process. The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business. In addition, small suppliers are exempt from the obligation to supply until 30 March 2021 so that they can protect their business if necessary.
The temporary insolvency measures contained in the Act aim to support businesses during the pandemic, help them to avoid insolvency and survive as a going concern. The new temporary measures are:
- Suspension of serving statutory demands and restrictions on winding-up petitions where unpaid debt is due to Covid-19 (two measures). Statutory demands will be void if served on a company during the “relevant period” (between 1 March and 31 December 2020). The aim is to give businesses the opportunity to reach realistic and fair agreements with all creditors. Winding-up petitions presented during the “relevant period” on the basis that a company is unable to pay its debts will be reviewed by the court to determine the cause of non-payment. Where the unpaid debt is due to Covid-19, no winding up order will be made.
- Suspension of the wrongful trading rules. In respect of the period 1 March 2020 to 30 September 2020 the Act temporarily removes the threat of personal liability for wrongful trading from directors (all other checks and balances on directors remain in place). The measure expired on 30 September 2020.
The Act also contains the following temporary corporate governance measures, intended to relieve the burden on companies and other entities and allow them to focus all their efforts on continuing to trade. Specifically, the Act contains measures that:
- Temporarily give companies (and other bodies) greater flexibility to hold Annual General Meetings (AGMs) and other meetings in a safe and practicable manner in response to the pandemic (e.g. virtual meetings). This measure applies retrospectively from 26 March 2020 to 30 December 2020. Directors are not exposed to liability for failing to hold an AGM in accordance with a company’s constitution.
- Temporarily extend filing deadlines at Companies House. The Act provides for a temporary extension to the period allowed for the directors of a public company to comply with their obligation under section 441 of the Companies Act 2006 to deliver accounts and reports for a financial year to the Registrar at Companies House. The measure applies retrospectively from 26 March 2020 and ends on whichever is the earlier of 30 September 2020, and the last day of the period of 12 months immediately following the end of the relevant accounting reference period. In addition, the Act empowers the Secretary of State to make regulations to extend the deadline for certain other filings at Companies House. This power expires on 5 April 2021.
The insolvency law measures in the Act are reserved in relation to Wales, in some respects devolved in Scotland and are fully transferred to Northern Ireland. The corporate governance measures on meetings and filings apply to the whole of the UK. Company law is a reserved matter in England and Wales and in Scotland.
This Commons briefing provides an outline of the main measures of the new Act.
Documents to download