The Corporate Insolvency and Governance Act 2020 came into force on 26 June bringing in measures to alleviate the burden on businesses during the Covid-19 pandemic and allow directors to focus their efforts on continuing to operate. In this article we consider the temporary changes to the wrongful trading regime and other key changes introduced by the Act.
Temporary wrongful trading relaxation
The Act changes the wrongful trading provisions (sections 214 and 246ZB of the Insolvency Act 1986) between 1 March 2020 and 30 September 2020 to give directors some breathing space to continue trading through financial difficulties during the pandemic. Where the company is likely to become insolvent, directors will still owe a duty to primarily act in the best interests of company creditors with a view to minimising potential losses, but it will be assumed, for the purposes of wrongful trading, that the directors are not responsible for any worsening of the financial position of the company or its creditors during the relevant period. It is important to note, therefore, that the Act merely imposes an assumption and does not suspend the wrongful trading provisions (as has been widely reported).
Save for this temporary relaxation, directors’ duties and responsibilities remain unaffected. This means they remain personally liable for misfeasance, fraudulent trading, common law and statutory breaches of duty, and they could still be subject to disqualification proceedings and compensation orders. The provision is therefore likely to be of limited benefit to directors.
Practical difficulties are also likely to arise from the change. The Act does not address the position if a company is still trading through difficulties when the suspension ends or how a director’s liability is calculated if losses relate to the period covered by the period of the relaxation and the period before or after it. It will therefore be for the court to interpret these matters which gives rise to uncertainty for insolvency practitioners bringing claims and directors concerned at their position.
Statutory Demands and Winding-Up Petitions
The Act introduces provisions temporarily preventing statutory demands being served by creditors, and winding-up petitions from being presented, against a company where the inability to pay its debts is due to the Covid-19 pandemic. A creditor may still present a winding-up petition where they have reasonable grounds to believe that the company would have become insolvent notwithstanding Covid-19 and a court may make a winding-up order if it agrees with the creditor’s assessment.
The new provisions also apply to any statutory demand served between 1 March 2020 and 30 September 2020; statutory demands served within these dates cannot form the basis of a winding-up petition presented at any point after 27 April 2020.
The courts actually began to adopt a lenient approach where a company’s financial difficulties are seemingly pandemic-related prior to the Act coming into force. In Re A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch) (2 June 2020), the High Court granted an injunction restraining the presentation of a winding up petition brought by a landlord against a retailer for non- payment of rent and service charges due in March 2020. Morgan J considered there was a strong case that the pandemic had had a financial effect on the company before the presentation of the petition and the facts on which the petition would be based would not have arisen if Covid-19 had not had a financial effect on the company. He concluded that any petition to wind up the company would likely fail, would have a seriously damaging effect on the company in the meantime, and for these reasons he refused to make the winding up order sought. His judgment preceded the new Act coming into force, but he considered the likelihood that the (then) Bill would receive Royal Assent was significant and essentially this underpinned his decision.
Moratorium
A new moratorium process is contained in the Act to help rescue financially distressed but viable companies. Directors of eligible companies can now apply for a 20 business day moratorium, which is potentially extendable for up to a year if certain criteria is met. The procedure imposes a stay on a wide range of creditor proceedings and a suspension on payment of certain debts. A monitor (an insolvency practitioner) must provide a statement in support of the application that, in their view, it is likely that the moratorium will result in the rescue of the company as a going concern.
The moratorium is intended as a light touch procedure with no pre-determined exit route and it remains to be seen how widely it will be used.
Restructuring plan
The Act introduces a new restructuring plan enabling companies encountering financial difficulties to enter into an arrangement or compromise with creditors.
Unlike CVAs, the plan can compromise secured creditors and provides an ability to overrule a class of dissenting creditors and offers a flexible means of eliminating, reducing or preventing, or mitigating the effect of, any of the financial difficulties.
Comment
The Covid-19 pandemic has presented a wide range of challenges for businesses, many of which were already struggling financially. The new legislation imposes restrictions on creditors’ usual rights giving debtors greater freedom to decide whether to trade through the pandemic. This will help reduce the number of businesses which would otherwise be forced into immediate closure, but this is likely to only be a short term cushion which, in many cases, delays the inevitability of entering an insolvency process.
For the time being creditors are likely to resort to other forms of enforcement where available, and failing this they will bide their time and proceed with demands and petitions later in the year once the restrictions end.
From a director’s perspective, the temporary legislative changes in wrongful trading laws are likely to be of only limited benefit, given the continuing obligation to comply with statutory duties and the fact that any breach of those duties will give rise to claims that can be pursued by an insolvency practitioner in the event of liquidation or administration. Where a company is faced with financial difficulties, directors would be well advised to seek early advice to avoid potential personal liability and increased creditor pressure when the temporary changes imposed by the Act cease to have effect.
