Corporate Insolvency and Governance Act 2020
This alert was written by Geoffrey Wynne, Alexandra Shipulina and Szonja Kolbenheyer (trainee solicitor)
The Corporate Insolvency and Governance Act 2020 ("the Act") received Royal Assent on 25 June 2020. The overarching purpose of the Act is to protect as many businesses as possible from falling into administration or insolvency as a result of the disruptions and hardship caused by the pandemic.
How Does the Act Compare to International Actions?
The UK’s response to the financial difficulties faced by companies as a result of Covid-19 appears to be in line with that of other European countries. By way of an example, in April 2020 Belgium passed a temporary ban on insolvency proceedings. France followed suit by actioning provisions intended to protect companies from insolvency for the period of the state emergency as well as the subsequent three months. Germany and Italy, to name only a few, have proceeded in the same manner, all placing temporary moratoriums on the filing of insolvency proceedings.
Key changes introduced by the Act
There will be a moratorium on continuing or bringing legal action against eligible companies save where the court provides leave. Eligible companies will be allowed to apply for a moratorium period, during which their debt obligations (unless explicitly excluded by the Act) will be suspended and they will be able to explore options aimed at rescuing the company as a going concern. This is subject to the company’s financial difficulties arising as a result of the Covid-19 pandemic. This is referred to as a ‘payment holiday’ within the Act.
Suspension of termination clauses in supply contracts
This provision prevents suppliers from ceasing, or threatening to cease, to supply a company where it is attempting to rescue its business. In essence, suppliers under contract will have to keep providing the agreed materials to the company in difficulty. This is subject to certain exceptions and includes safeguards so that it does not result in financial difficulties for the suppliers.
Temporary suspension of wrongful trading provisions for directors
This provision intends to temporarily remove directors’ personal liability for wrongful trading in the event that a company continues to trade during the Covid-19 pandemic with uncertainty as to whether it will be able to avoid going insolvent during, or shortly after, the crisis. This measure is envisaged to have retroactive effect from 1 March 2020 and is expected to last until 30 September 2020. Liability for fraudulent trading, however, has not been removed.
Arrangements and reconstructions for companies in financial difficulty
Eligible companies now have arrangements and various restructuring options made available to them pursuant to the Act.
Temporary suspension of statutory demands and winding up petitions
Similarly to the temporary easing of directors’ liability for wrongful trading, this measure would be retroactive, applying from 1 March 2020. It is intended to temporarily prohibit statutory demands and winding up petitions from being issued where the outstanding debts of a company are due to the Covid-19 pandemic. Creditors can only proceed with such petitions if they are able to demonstrate that the company’s inability to pay was not a result of the pandemic.
Flexibility around Annual General Meetings (AGMs)
The Act introduces a provision whereby companies are allowed to deviate temporarily from conducting their AGMs in person and are permitted to use other means.
Flexibility around filing requirements
This measure is not, as such, included in the Act but sections 38-40 provide that the UK Secretary of State is given limited powers to enact regulations aimed at extending filing deadlines in certain instances. On 27 June 2020 the Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020 (‘the Regulations’) came into force, providing for such temporary extensions. Affected filings include accounts, confirmation statements, event-driven filings such as any changes to the company and registration of charges.
Excluded Entities and Contracts
In order to ensure continuing consumer protection and financial stability, the majority of the provisions envisaged by the Act do not generally allow for institutions providing financial services and businesses carrying out regulated activities under the Financial Services and Markets Act 2000 to benefit from them.
The benefits of a moratorium, the suspension of termination clauses and the removed liability for wrongful trading will not be available for businesses safeguarding client assets, banks, investment firms, insurance companies, some financial services firms, payments and e-money institutions and certain market infrastructure bodies.
Similarly, contracts and other instruments for, or involving, financial services will also be excluded from the benefits. Such excluded contracts include master agreements for securities financing transactions, market contracts, qualifying collateral arrangements and property transfers, contracts secured by certain charges or arrangements, default arrangements and transfer orders, capital market arrangements, contracts forming part of a public-private partnership, derivatives, financial contracts, spot contracts, card-based payment transactions and securities financing transactions. This is set out in more detail in Schedule 2 of the Act.
Enforcement of Securities under the Act
The Act provides for a temporary restriction on enforcing securities against eligible companies that have been granted a moratorium. Taking steps to impose restrictions on the disposal of any such company property will also be temporarily prohibited. Section 1, A22 introduces a restriction on serving notice on such companies as to the crystallisation of any floating charge unless such a floating charge is a collateral security, market charge, security financial collateral arrangement or system charge to which this restriction does not apply.
The key exception, as mentioned above, is the enforcement of any collateral security charge arising under a financial collateral arrangement, which will continue to be enforceable during the moratorium. This exception is in line with the current position under Regulation 8 of the Financial Collateral Arrangements (No. 2) Regulations 2003 and Paragraph 43(2) of Schedule B1 to the Insolvency Act 1986 which provide that restriction on the enforcement of security does not apply to financial collateral arrangements, thus those continue to remain enforceable even in the event of administration or insolvency. This remains largely the position under the Act.
Prohibitions on Companies during the Moratorium
By virtue of Section 1, A26, eligible companies that have been granted a moratorium will be prohibited from granting securities during the period of the moratorium, save that this will be possible should the ‘monitor’ (similar to an appointed administrator) provide consent.
Companies that have been granted a moratorium, as well as their relevant officers, will be committing an offence by entering into a market contract, a collateral financial arrangement or providing any collateral security, by giving a transfer order or granting a market charge or system charge during this period.
Points to Note
Section 20 of the Act gives the Secretary of State the power to enact further regulations that may amend the effects of the Act. This supports the overarching goal of decreasing, as much as possible, the number of entities that enter into corporate insolvency or restructuring procedures. There is, however, a time limit of six months on the effects of any secondary legislation enacted pursuant to this Act by the Secretary of State (subject to possible extensions). Attention should be paid to further regulations.
Businesses and their legal counsel should check whether their counterparts are eligible to benefit from the protections provided by the Act, with special attention as to whether the counterparty has been granted a moratorium. In such instances additional rules apply as to the taking and enforcing of security, which needs to be taken into account when drafting and/or entering into and/or enforcing agreements.
For further information or advice in relation to these regulations, please contact the lawyer at Sullivan with whom you regularly consult, or the authors listed above.
 Companies are generally eligible unless they are specifically excluded under Schedule 1 of the Act
 Section 14 - http://www.legislation.gov.uk/ukpga/2020/12/section/14/enacted