An Overview of the Corporate Insolvency and Governance Act (edited following grant of Royal Assent )
The Corporate Insolvency and Governance Act is currently being considered in the House of Lords and is expected to become law later this month.
This Bill went on to receive Royal Assent on 25 June
Whilst secondary legislation will be needed before many of the measures come into effect, here we look at some of the effects of the new legislation.
The legislation can be thought of as having two purposes. The first is to introduce temporary changes to the law with respect to the governance and regulation of companies and other legal entities in response to the challenges brought about by Covid-19. The second is to implement long-awaited provisions for companies and other legal entities in financial difficulty.
The legislation introduces flexibilities to enable companies, charitable incorporated organisations, and co-operative and community benefit societies to hold virtual, or closed, meetings of their members, and to communicate with members electronically, when it would not otherwise be permitted under their constitution.
The provisions relating to meetings are retrospective, effective from 26 March 2020, and last until 30 September 2020. A corporate entity that has, since 26 March, already held their Annual General Meeting (‘AGM’) in line with social distancing restrictions, but in so doing failed to comply with requirements in their constitution, will have acted lawfully. For entities forced to postpone an AGM due to be held since 26 March, they have until 30 September to hold the AGM using the new flexibilities.
Under the provisions, members’ meetings:
- need not be held at any particular place;
- may be held, and votes may be counted, by electronic, or other, means; and
- can be held without any number of those participating in the meeting being together at the same place.
Temporarily, a member will not have any right to attend the meeting in person, nor participate in the meeting other than by voting, nor to vote by any particular means.
The legislation seeks to reduce administrative pressures for companies by enabling further regulations to be introduced to temporarily extend filing deadlines at Companies House.
For private companies, the extension applies to the filing of accounts, confirmation statements, registration of charges and other notices at Companies House. Where the current filing period is 21 days or fewer, the extended period shall not exceed 42 days. Where the current filing period is 3, 6 or 9 months, the extended period shall not exceed 12 months.
For public companies, the extension applies where the obligation under section 441 of the Companies Act 2006 to deliver accounts and a financial year end report falls after 25 March 2020 and before the “Date”. The Date is the earlier of 30 September 2020 or the last day of the period of 12 months after the end of the relevant accounting period. Directors will have until the Date to comply with the section 441 obligation.
The legislation introduces a time-limited suspension which temporarily removes the threat of personal liability for directors for wrongful trading under sections 214 and 246ZB of the Insolvency Act 1986. Under the suspension, it is to be assumed that a director is not responsible for any worsening of the financial position of a company or any of the company's creditors during the period of 1 March 2020 to 30 June 2020 (or one month after the new legislation comes into force as an act of law, if later). This is known as the "Relevant Period".
As the wrongful trading rules apply to charity trustees of CIOs, they will also benefit from this suspension.
Winding up petitions
Also in response to Covid-19, a creditor is to be temporarily prevented from presenting a winding up petition. This measure has retrospective effect, preventing a creditor from presenting a petition on or since 27 April 2020, and continues until the end of the Relevant Period. The prohibition applies to all petitions on any insolvency ground unless the creditor has reasonable grounds for believing that (i) Covid-19 has not had a financial effect on the company; or (ii) the facts of the insolvency ground would have arisen even if Covid-19 had not had a financial effect on the company.
It is the Government's intention that its retrospective nature will increase the effectiveness of this new provision. It has also been widely commented that the definition of financial effect, being 'any worsening financial position as a consequence of Covid-19', will introduce a low threshold above which the prohibition applies.
Another temporary measure introduced, also effective since 27 April 2020, prevents a company, its directors, or any other person, as well as creditors, from presenting a winding up petition on the ground that the company is unable to pay debts exceeding £750 when the written demand for payment of such debts was served after 1 March 2020. This measure shall also continue until the end of the Relevant Period at the least.
Moratorium on enforcement action
This is one of the permanent changes introduced by the legislation. New provisions implemented into the Insolvency Act 1986 create a new moratorium for companies experiencing financial difficulties. The measure is designed to give companies in financial trouble that are seeking a rescue "breathing space" from their creditors. Whilst the moratorium is in place, existing creditors cannot bring an action against a company. The moratorium will initially last for 20 business days and can be extended for a further 20 business days without the consent of creditors. Further extensions are possible with the consent of the company's creditors or the court. The moratorium is not connected to any particular insolvency process.
These rules will also apply to CIOs, as the insolvency procedures in the Insolvency Act apply (with modifications) to them.
New restructuring plan
Another permanent measure introduced sets out the process of a new restructuring plan for businesses in financial difficulty to restructure their liabilities. As under existing insolvency law, under the new process, a company's creditors will have the opportunity to approve a plan. Creditor approval will require at least 75% approval from each class of creditor. However, a hallmark of the new plan is that the courts will have ultimate discretion to approve a plan and bind all creditors to it, irrespective of any creditor approval. In this way, the Government's intention is that the new plan will be one of several measures that will reduce the number of corporate insolvencies and increase the support available to businesses.
Prohibiting supplier termination clauses and "any other thing"
A new permanent change to the law will restrict the rights of suppliers to include provisions in their contracts that allow for the contract to be terminated or amended, or for the supplier to "do any other thing", where a company enters into an insolvency or restructuring process when the contract is already in place. This change, in effect, extends the scope of existing restrictions that are already in force preventing suppliers of essential goods and services from terminating contracts. The intention of this measure is to assist a company in financial difficulty to continue trading.
What measures are of particular concern to landlords?
Several of the measures in the new legislation are of particular concern for landlords, who have seen remedies available to them significantly curtailed since the outbreak of the pandemic. The temporary ban on the use of statutory demands and winding up petitions applies in relation to commercial tenants who are unable to pay their rent as a result of Covid-19.
In addition, new secondary legislation will be introduced to prevent landlords from using the Commercial Rent Arrears Recovery procedure unless they are owed at least 90 days rent (increased from the current minimum of 7 days).
Whilst these measures are no doubt welcomed by tenants, they leave landlords with little recourse, given that they are also currently unable to forfeit commercial leases for a failure to pay rent due to the moratorium introduced by the Coronavirus Act 2020.
Although many of the permanent changes have been long awaited, they are understandably now being carefully viewed in light of Coronavirus. As such, any measures introduced with the intention of offering support to businesses, many of which are experiencing unprecedented restrictions, challenges and uncertainty, is welcomed. Where measures only apply temporarily, however, it is important to be aware of relevant time periods and ongoing duties and risks. It should also be noted that the changes do not fundamentally alter the duties of directors at times when their company is experiencing financial difficulties, or the provisions in the Insolvency Act 1986 which provide for the review of transactions undertaken by companies pre-insolvency, which prejudice creditors.