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How Will the Corporate Insolvency and Governance Act Help Recovery?

The Corporate Insolvency and Governance Bill received royal assent on the 25th June 2020. Parliament created this Act with the goal of helping the economy and businesses recover following the extended COVID-19 lockdown.

What are the Measurers included in the Corporate Insolvency and Governance Act 2020?

The Corporate Insolvency and Governance Act includes several insolvency measures, that provide support for businesses as they endeavour to recover financially following the Coronavirus Crisis. These measures include:

Moratorium periods:

One of the first insolvency measures in the Act is to try to provide businesses that might struggle, with formal breathing space to develop a rescue plan.

During this formal breathing space, no legal action can be brought against a company without the consent of the court. The moratorium period allows businesses 20 business days to develop a plan while normal directors remain in control. However, a licensed insolvency practitioner must oversee the process. This 20-day period can be extended to 40 business days, with additional extensions possible if the creditors of the court agree.

Termination clauses:

The Act also includes a permanent alteration regarding the use of termination clauses in supply contracts. In the event that a business is in the midst of an insolvency or restructuring procedure or obtains a moratorium period, during this time suppliers are not be permitted to cease providing supplies under contractual terms.

The business is still required to pay for any supplies provided while in the insolvency process but are not required to pay outstanding bills for past supplies while arranging a rescue plan.

This measure also includes added protections for suppliers in the event that the requirement to continue providing supplies may cause damage to their own business.

Restructuring plans:

This measure allows business (or their creditors or members) to propose a new restructuring plan as an alternative rescue plan if they are facing financial struggles. Such a plan would allow complex debt to be restructured and support the addition of new finances.

The measure introduces a cross-class cram down that will allow unorthodox classes of creditors to be bound by the new plan if the court determines it to be equitable and fair, as well as if it is determined that the creditors would be no worse off if the company were to enter a different insolvency process.

The objective of this measure is to enable more companies to recover rather than go through the liquidation route, which would provide poor returns for creditors and result in job losses.

Statutory demands:

The Corporate Insolvency and Governance Act also creates temporary provisions that eradicate statutory demands made between the 1st of March 2020 and the 30th of June 2020, as well as restricting any winding up petitions issued from the 27th of April 2020 through to the 30th of June 2020.

These measures are temporary and intended to prevent aggressive creditors from taking action against businesses that would otherwise be able to remain viable but are struggling due to COVID-19.

Wrongful trading suspensions:

This part of the Act temporarily removes the risk of personal liability for company directors as it relates to wrongful trading.

Such a change allows directors to be able to act with assurance and put forth all efforts to continue trading during these unprecedented times, without the risk of personal liability. This measure will apply for any trading taking place between 1st of March 2020 until the 30th June 2020.

It is worth noting that the Act will exclude some financial firms and contracts from some of the measures, including:

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

Financial service firms will be included in the new restructuring plan, but with certain safeguards, which is a role for the financial services regulators.

Annual General Meetings and General Meetings:

The Corporate Insolvency and Governance Act also includes alterations which allow businesses under a 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 can avoid exposure to liability for measures that normally require shareholder approval.

This measure is to be retrospective from the 26th March 2020 in order to protect any company that had already held its general meeting and did not meet the existing obligations of their organisational constitution.

However, this measure will not prevent shareholders from exercising their right to vote on resolutions or other matters brought before the meeting.

Planning for the Future

The government has three specific prime goals it hopes the Act will achieve…

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

With the government hoping to continue the easing of lockdown measures and restrictions, many businesses may find themselves having to manage difficult financial circumstances.

These measures along with the Corporate Insolvency and Governance Act is to provide additional security and financial flexibility for businesses as they attempt to recover.

To discuss your businesses risk management and insurance requirements to help with your businesses financial future, contact us today.

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