Topic: Coronavirus 

Changes to UK insolvency law to protect businesses

24 Nov 2020

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With the COVID-19 pandemic having caused a global economic decline, it is unsurprising that many businesses find themselves struggling financially, particularly in relation to cashflow. 

While the government has made several announcements on measures to support struggling businesses, a significant change to insolvency legislation has boosted the ability for companies to survive, what could have otherwise been, a business ending event.

The objective of this legislation is to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time. The measures are designed to help companies, and other similar entities, by easing the burden and helping them avoid insolvency.

The Corporate Insolvency and Governance Act 2020 (CIGA) came into force in June, following the publication of the draft legislation in May.

The measures are temporary and have already been subject to extensions, originally set to expire on 30 September 2020. The majority of provisions have already been extended to 31 December 2020.

Whilst the changes will come as a relief to debtors, creditors may be concerned that the recovery of monies will become more difficult, adding additional pressure to their own businesses.

A summary of the key changes

Suspension of statutory demands and winding-up petitions
No winding-up petition can be presented on or after 27 April 2020 on the grounds of a statutory demand having been served (and not complied with), if the demand was served in the period from 1 March 2020 to 31 December 2020.

Although creditors can present winding-up petitions against insolvent companies, even without prior service of a statutory demand, the CIGA dictates that a creditor can only do this now, if they have reasonable grounds to believe that COVID-19 has not had a ‘financial effect’ on the debtor, and the debtor would have been insolvent even if COVID-19 were not to have happened

The definition of ‘financial effect’ is wide reaching and likely to be fairly easily met.  As such, it would follow that far less winding-up petitions are likely to be made orders.

This new insolvency procedure allows for a 20 day moratorium giving breathing space to a company while they seek a solution to their difficulties. This must be monitored by a licensed insolvency practitioner, to protect the interests of creditors, including considering whether a rescue of the company is likely.

During the moratorium the business is protected from most other insolvency proceedings, as well as enforcement action by creditors.

Suspension of liability for wrongful trading
Wrongful trading is when a director allows a company to continue to trade even if they knew, or ought to have known, that the company could not avoid insolvent liquidation. Contravention can result in personal liability of directors for company debts.

The wrongful trading provisions were suspended from 1 March 2020 to 30 September 2020. Unlike other pieces of legislation governed by the CIGA, this measure was not extended and expired on 30 September 2020.

On 26 November, and in response to the further lockdown measures, this was re-implemented with an expiry date of of 31 March 2021. This effectively leaves a gap in the ‘safety net’ of 1 October 2020 to 25 November 2020.

Termination clauses in supply contracts
The CIGA introduced an additional clause to the Insolvency Act 1986 providing that, when a company becomes subject to an insolvency procedure (including the new moratorium), termination clauses in supply contracts can no longer be exercised by the suppliers during the period of that insolvency procedure.

The CIGA also prevents supplier companies from doing “any other thing” in respect of that supply contract, including varying the terms of the contract, increasing prices or seeking to enforce a guarantee.

The purpose of this legislation is to attempt to give the insolvent company a greater chance of rescue or survival by enabling it to continue to trade and receive supplies, provided it can pay for these ongoing supplies.

Prohibition on forfeiture for non-payment of rent (in business tenancies)
The Coronavirus Act 2020 had already provided a prohibition on forfeiture for non-payment of rent and restricts landlords pursuing business tenants under the provisions of Commercial Rent Arrears Recovery (CRAR).

The provisions (having already been extended once) are currently set to last until 30 December 2020 but may be extended further.

As with the COVID-19 pandemic, the implemented law is continually evolving, with deadlines and time limits changing regularly.  The best advice to business owners concerned with the viability of their business, and the personal impact it may have on their own financial position, is to seek advice early and assess the options available to protect the business and themselves.

If you are concerned or would like further information, contact your relationship partner. Or, contact Steven Henson from Castle Hill Insolvency at or on 01392 539820.

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