A Scramble to save viable companies over the summer?

The news this past fortnight, sadly, has been of many job cuts and of the demise of further well-known companies who have been hit by the disastrous financial effects of coronavirus.

Those who practise in the field of insolvency will have been getting up to speed with the changes brought in by the Corporate Insolvency and Governance Act 2020 which, after a very swift passage through Parliament, came into force on 25 June 2020.

For those of you with a more general practice who may have been busy with other matters, may I briefly draw to your attention a few of the most significant changes to UK insolvency legislation since the Enterprise Act in 2003.

Under the new “Moratorium” process, the management of the insolvent company will remain with its directors, subject to monitoring by an Insolvency Practitioner (the “Monitor”), to be chosen by the directors. The directors will initiate the process, either by filing the requisite documents or by application to the court. The process is intended either as a stop-gap, enabling companies with short-term financial difficulties breathing space to survive, or as a route into another process, such as a CVA or scheme.

During a Moratorium, the company must pay its ongoing debts as and when they fall due. It lasts for 20 business days, initially, but this may be extended to 40 days with the consent of creditors and up to a year by application to the court. For an out-of-court appointment, the Monitor must be satisfied that it is likely that a Moratorium would rescue the company as a going concern.

Until 30 September 2020, there is a temporary relaxation of the test: the Monitor can be satisfied that it is likely that a Moratorium would result in the rescue of the insolvent company as a going concern “..if it were not for any worsening of the financial position for reasons relating to coronavirus.”

This may enable a larger number of insolvent companies to take advantage of a Moratorium and its protection from the pursuit of the pre-moratorium creditors (which are defined expressly to exclude employees owed wages or redundancy money).

Until 30 September 2020, the threat to an insolvent company of a winding up petition is greatly lessened by provisions in Schedule 10 to the new Act which provide, in summary, that:

  1. Any petition based upon a statutory demand served during the period from 1 March 2020 until 30 September 2020 is barred;

  2. A creditor may not present a winding up petition unless it had reasonable grounds for believing at the date of presentation that:

a) coronavirus has not had a financial effect upon the company, or

b) the company would have been unable to pay its debts even if coronavirus had not had a financial effect upon the company.​

It therefore seems likely that we will not see a dramatic increase in compulsory liquidations until the Autumn.

The other provision to which I draw your attention is that which renders ineffective a termination clause in a contract for the supply of goods or services if a company becomes subject to a relevant insolvency procedure. There is a temporary exclusion for small suppliers.

The new Act also brings in a “restructuring plan” (similar to a scheme of arrangement) and liability for wrongful trading is suspended retrospectively between 1.3.20 and 30.9.20.

Please contact Ian Hogg, the Senior Clerk at 1 Essex Court, on 0207 936 3030 should you require assistance with issues arising out of the new developments, or other questions relating to corporate or personal insolvency law.

Birgitta Meyer

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