Corporate Insolvency and Governance Act Aims to Aid Recovery

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The Act serves to implement various measures to help the economy and businesses recover following extended lockdown measures and closures due to the coronavirus pandemic.

On 25th June 2020, the Corporate Insolvency and Governance Bill received royal assent, becoming an Act just over one month after being introduced in Parliament on 20th May.

The Act has been created and approved with the goal of implementing various measures that will help the economy and businesses recover following extended lockdown measures and closures due to the coronavirus pandemic.

Insolvency Measures
The Corporate Insolvency Zand Governance Act includes a number of insolvency measures that are intended to provide support for businesses as they attempt to recover financially. These measures include:

  • Moratorium periods—The first insolvency measure in the Act aims to provide businesses that may be struggling with formal breathing space to develop a rescue plan. During this formal breathing space, no legal action can be taken against a company without leave of the court. The moratorium period allows businesses 20 business days to develop a plan while normal directors remain in control of operations— although, the process must be overseen by a licensed insolvency practitioner. The 20-day period can be extended to 40 business days, with additional extensions possible if creditors of the court agree.
  • Termination clauses—The Act includes a permanent change regarding the use of termination clauses in supply contracts. In the event that an organisation is in the midst of an insolvency or restructuring procedure, or obtains a moratorium period during this time, suppliers will not be permitted to cease providing supplies under contractual terms. The organisation will still be required to pay for any supplies provided while in the insolvency process, but will not be required to pay outstanding bills for past supplies while arranging a rescue plan. This measure also includes additional protections for suppliers in the event that the requirement to continue providing supplies may cause harm to their own business. Small suppliers will be granted a temporary exemption.
  • Restructuring plans—This measure allows organisations (or their members or creditors) to propose a new restructuring plan as an alternative rescue option if they are experiencing financial struggles. Such a plan would allow for complex debt arrangements to be restructured and support the injection of new rescue finance. The measure introduces a cross-class cramdown that will allow dissenting classes of creditors to be bound by the new plan if the court determines it to be fair and equitable, as well as if it is determined that the creditors would be no worse off if the company were to enter a different insolvency procedure. The goal of this measure is to enable more companies to recover rather than go through the liquidation process, which would provide poor returns for creditors and result in lost jobs.
  • Statutory demands—Furthermore, the Corporate Insolvency and Governance Act creates temporary provisions that eliminate statutory demands made between 1st March 2020 and 30th June 2020, as well as restrict winding up petitions from 27th April 2020 through 30th June 2020. These measures are temporary and are intended to prevent aggressive creditors from taking action against companies that would otherwise be able to remain viable, but are struggling due to the pandemic
  • Wrongful trading suspensions—This portion of the Act temporarily eliminates the risk of personal liability for company directors as it pertains to wrongful trading. Such a change allows directors to be able to act with assurance and put forth all effort to continue trading during these uncertain times, without the threat of personal liability. This measure will apply for any trading taking place between 1st March 2020 and 30th June 2020.

It is worth noting that some financial services firms and contracts have been excluded from some of the measures contained in the Act, including:

  • Moratorium period changes
  • Termination clause revisions
  • Wrongful trading suspensions

Financial service firms will be included in the new restructuring plan measure, albeit with certain safeguards—such as a role for the financial services regulators.

Annual General Meetings and General Meetings
The Corporate Insolvency and Governance Act also includes changes that will allow organisations under legal requirement to hold annual general meetings or general meetings to do so by means that their constitution would not normally allow. As such, directors may avoid exposure to liability for measures that require shareholder approval, and the rights of shareholders will not be violated.

This measure is intended to be retrospective from 26th March 2020 in order to protect any company that already had to hold a general meeting that did not meet the existing obligations of their organisational constitution. This measure won’t prevent shareholders from exercising their right to vote on resolutions or other matters brought before the meeting, although they may not be able to do so in person.

Planning for the Future
The UK government has three specific primary goals that it hopes the Act achieves, including:

  1. The introduction of new corporate restructuring tools to the insolvency and restructuring regime to give companies the breathing space and tools required to maximise their chances of survival
  2. The temporary suspension of certain aspects of insolvency law in order to allow directors to continue trading without risk of personal liability, and to protect organisations from aggressive creditors
  3. The amendment of company law and other legislation for the purpose of granting organisations and other parties with temporary easements on company filing and annual general meetings (as such, these parties will be able to focus their resources more heavily on maintaining operations)

With the UK government hoping to continue easing lockdown measures and restrictions, many organisations may find themselves having to manage difficult financial situations. These measures—and the Corporate Insolvency and Governance Act as a whole—are intended to provide additional security and financial flexibility for organisations as they attempt to recover.

For more information on the Corporate Insolvency and Governance Act, or other guidance on navigating your organisation’s financial future, contact one of our brokers today.




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