Corporate Insolvency and Governance Act 2020: a practical guide to the key reforms

Despite its rapid, five-week passage from first reading to royal assent, the CIGA 2020 is the most significant development in insolvency law since the Enterprise Act 2002.

The catalyst for the CIGA 2020 was the coronavirus (COVID-19) pandemic, and its objective is “to provide businesses with the flexibility and breathing space they need to continue trading, and to help them avoid insolvency during this period of economic uncertainty”. It introduces both temporary and permanent provisions, some of which had been previously consulted on (such as the changes to corporate restructuring, which are not considered in this article). Some of the temporary measures have been extended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, which come into force on 29 September.

Winding-up petitions: temporary restrictions

Statutory demands

Creditors remain free to serve statutory demands on companies, but a winding-up petition cannot be presented if it relies on a statutory demand served between 1 March 2020 and 31 December 2020. Creditors considering serving a statutory demand as leverage should bear in mind that:

1. winding-up is not a method of debt collection, and
2. serving a statutory demand may trigger a wholly justified application by the company to injunct presentation of a petition.

Petitions presented between 27 April and 31 December 2020

Petitions cannot be presented between 27 April 2020 and 31 December 2020, unless the petitioning creditor has reasonable grounds for believing that COVID-19 has not had a financial effect on the company, or the grounds for winding-up would have arisen regardless (this is known as “the COVID-19 condition”). If the COVID-19 condition is not met, the petition will, no doubt, be struck out or dismissed.

The court will not make a winding-up order on a petition presented after 27 April 2020 unless it is satisfied that the ground for winding-up would apply regardless.

Naturally, the court is more willing to grant adjournments where the company’s ability to pay has been impacted by COVID-19

In practice, judges expect to hear from the petitioning creditor as to whether the CIGA 2020 applies and, if so, how it affects their petition.

Winding-up orders are being made during this period, but only if petitions were presented before 27 April 2020, or where the petition debt clearly pre-dates early 2020. Where the petition debt arose in 2020, Insolvency and Companies Court judges in the High Court in London have indicated that they would be assisted by a short witness statement from the petitioning creditor, explaining why the ground for winding-up would apply regardless. No doubt other courts would also welcome such evidence. Naturally, the court is more willing to grant adjournments where the company’s ability to pay has been, or is being, impacted by COVID-19.

Winding-up orders made between 27 April and 25 June 2020

Winding-up orders made between 27 April 2020 and 25 June 2020 are void if the court could not have made the order had the CIGA 2020 been in force. In such cases, it seems likely that the petitioning creditor will have to pay the costs of the official receiver or liquidator. This issue is not expected to arise in many cases, since few post-March 2020 petitions were substantively heard in that period, and there was widespread industry awareness of the draft legislation.

Suspending liability for wrongful trading – 1 March to 30 September 2020

This temporary change was much trumpeted as both a short-term removal of the threat of personal liability for directors, and a restriction on insolvency practitioners’ ability to bring claims against directors for wrongful trading. However, section 12 of the CIGA 2020 only provides that – when determining the proper contribution, if any, for a person to make to a company’s assets – the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors from 1 March 2020 to 30 September 2020.

The word “assume” is unusual in civil litigation, and it is unclear whether an insolvency practitioner can lead evidence to rebut the assumption. It appears unlikely that the courts would be willing to interpret section 12 as providing blanket protection to directors for wrongful trading where it is clear that COVID-19 was not the cause of a company’s worsening finances.

Further, directors can still be liable for negligence and breach of their duties, including their statutory duty to act in the best interests of the company’s creditors when insolvency is likely.

Moratoriums

The introduction of moratoriums is a significant permanent change to the insolvency regime in England and Wales, akin to a US Chapter 11-style, debtor-in-possession process. The intention of a moratorium is to give a company some breathing space to explore rescue and restructuring options without the threat of action by creditors. The Insolvency Service has published guidance for monitors, which provides useful background and an overview of the process.

The initial period of a moratorium is 20 business days, but this can be extended.

The effect of a moratorium is similar to the temporary moratorium obtained by filing a notice of intention to appoint administrators:

• all insolvency proceedings, enforcement and legal process are restricted
• a qualifying floating charge-holder cannot give notice to crystallise or restrict disposal of a company’s property.

There are further restrictions imposed on the company as to the obtaining of credit, granting of security, disposal of property, and payments to certain creditors. During the moratorium, the company benefits from a payment holiday in respect of pre-moratorium debts. It is a matter of debate as to whether the moratorium offers any particular advantage over the interim moratorium obtained by filing a notice of intention.

Monitors

The moratorium is overseen by a monitor, who must be an insolvency practitioner, and whose roles and responsibilities include:

• notifying Companies House and creditors of the moratorium, and
• consenting to certain acts of the company, such as the granting of security over its property.

The monitor is obliged to bring the moratorium to an end in defined circumstances.

How to obtain a moratorium

In the case of an English or Welsh company which is not subject to an outstanding winding-up petition, a moratorium can be obtained by filing “relevant documents” at court. These include a statement from the proposed monitor that, inter alia, in their view, it is likely that the moratorium will result in the rescue of the company as a going concern. This seems a high threshold, and it is possible that few insolvency practitioners will want, or be able, to express such a view.

In all other cases, an application to court must be made to obtain a moratorium. The court will only order a moratorium if it is satisfied that it will achieve a better result for the company’s creditors as a whole than liquidation.

Restriction on enforcement of ipso facto clauses

Section 14 of the CIGA 2020 has introduced a new section 233B into the Insolvency Act 1986, which provides that:

• (i) ipso facto clauses cease to have effect when a company becomes subject to a relevant insolvency procedure, and
• (ii) clauses permitting a supplier to terminate a contract for cause cannot be exercised during the insolvency period.

There are two permanent exceptions.

1. If the relevant officeholder or the company consents to termination of the contract – or if the court is satisfied that the continuation of the contract would cause the supplier hardship, and therefore grants permission for termination of the contract. “Hardship” is not defined, but presumably evidence that the contract’s continuation would negatively impact the supplier’s solvency will be sufficient grounds to obtain a court order.
2. If the company enters a further relevant insolvency procedure (provided that the relevant officeholder, the company or the court consents).

Until 30 March 2021, “small suppliers” who meet at least two of three conditions relating to turnover, balance sheet and number of employees are exempt.