The Corporate Insolvency and Governance Bill (“The CIGB”) was introduced to the House of Commons on 27 May 2020. Designed as a measure to ease the burden on UK businesses during the COVID – 19 pandemic, the Bill introduces sweeping reforms to the UK’s insolvency regime.
Key measures:
- A moratorium for companies in financial distress granting breathing space to consider rescue and restructuring options without creditor action.
- A new flexible restructuring procedure with “cross – class cram down” features.
- Restriction on termination clauses in supply chain contracts.
- Temporary suspension of wrongful trading provisions.
- Temporary extensions to the deadlines relating to Companies House filing requirements.
- Temporary restrictions on the presentation of winding up petitions.
Chasing debts – the winding up petition
The Insolvency Act 1986 and The Insolvency Rules 2016 govern the court’s power and the procedures to have a company wound up on the grounds that it is unable to pay its debts. Any company creditor that is owed at least £750 can petition to the court that the debtor be liquidated and any proceeds realised used to settle outstanding debts.
A winding up petition is the most serious action a creditor can take. In many cases, service of a statutory demand precedes the presentation of a winding up petition. This is a formal request for payment issued by an outstanding creditor and the debtor will have 21 days to respond.
Under the new bill, the CIGB, Clause 8 and Schedule 10 contain provisions which restrict the issue of winding up petitions based on statutory demands.
- Under Paragraph 1 of Schedule 10 no winding up petitions can be presented from the period 27 April 2020 (it has retrospective effect) if they rely upon statutory demands served during the relevant period.
- The relevant period is between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is later).
- Paragraph 2 and 3 of Schedule 10 states that no winding up petitions are to be presented during the relevant period unless the creditor has reasonable grounds for believing that:
- (i) Coronavirus has not had a financial effect on the company or;
- (ii) The company would have become unable to pay its debts even if the coronavirus had not had a financial effect on the company.
- Paragraphs 5 and 6 permit the winding up of a company only if the court is satisfied that the relevant ground relied upon would have applied, even if coronavirus had not had a financial effect on the company.
For winding up petitions presented in the period between 27 April and the Bill coming into force:
- The court can make an order to restore the debtor to the position of that before the petition was presented, unless it can be shown that coronavirus had no financial effect.
For winding up orders made in the period between 27 April and the Bill coming into force:
- The court is to be regarded as having had no power to make the order and it is void.
Commentary
From the outset it is worth noting that “financial effect” appears to be a low threshold with a debtor merely having to show that their financial position worsened in consequence of, or for reasons relating to, coronavirus. This is not surprising considering that the objectives of the Bill are to support those companies adversely affected by the pandemic.
It’s also important to appreciate that the court must be satisfied that “coronavirus”, rather than lockdown did not have a financial effect on a company. This extends the scope of the court’s discretion and could include circumstances which predated the UK’s first coronavirus case, such as a fall in consumer confidence.
Guidance published earlier this month suggests that whilst the government is worried about an influx of insolvency situations, they also recognise that businesses need to be paid promptly. The guidance is non-specific and stresses that it is not law, but it is clearly a plea for companies to act reasonably. The Bill builds on this guidance by ensuring that debtors with temporary cash flow issues, can avoid being wound up if it can be shown that the pandemic has adversely affected their business. That exception comes at a price. It adds an easily invoked ‘get out’ provision. This could add complexity to what is intended to be a streamlined process. Statutory demands should provide a ‘black and white’ answer as to whether a company is deemed unable to pay its debts. The addition of the new provision gives scope for the exercise to become one in shades of grey. Creditors and debtors should prepare themselves for arguments on this issue.
Ultimately, the measure regarding statutory demands and winding up petitions are temporary, but Parliament does retain the power to extend the time limits if necessary.
