In various announcements at the daily press briefings, the Business Secretary appeared to have made immediate changes to the corporate insolvency law. As we know, changes to law do not come into force upon an announcement; the announcements of the Business Secretary were proposals in respect of changes to corporate insolvency law. These proposals (and much more than was in the announcements) are now in the form of a bill making its way through the House of Commons and House of Lords until it is ready to receive royal assent. It is only when the Queen formally agrees to make a bill into an Act of Parliament it becomes law. The CI&GB 2020 is now before Parliament and it divides into two temporary provisions for coronavirus and reforms to the insolvency regime.
The proposed temporary provisions are:
- Suspend liability for wrongful trading.
- Prevent presentation of winding up petitions unless the creditor can show coronavirus has not had a financial effect on the company.
- Suspend company meetings and filings.
Reforms to the insolvency and company regime include:
- A moratorium which is a new short term debtor in possession restructuring process with monitoring and court oversight.
- Suspend termination on insolvency in supply contracts.
- A new scheme regime that includes cross-class cram-down.
All these proposed changes are debtor-friendly. It was not that long ago when it appeared that the insolvency laws in England and Wales were heading in a creditor friendly direction after so much criticism by the media and politicians of high profile directors. Whenever the government wants to protect companies or encourage growth and entrepreneurialism they implement debtor-friendly laws.
Below I comment only on the temporary provisions concerning statutory demands and the presentation of winding up petitions as these are the changes that are quite far-reaching.
Temporary Provisions for Coronavirus
Statutory Demands and Presentation of Winding Up Petitions
Following Rishi Sunak’s announcement, it seemed that the proposed legislation would be dealt with promptly and was to restrict the use of statutory demands and winding up petitions by commercial landlords in order to “protect the UK high street from aggressive rent collection and closure” in the context of the Covid-19 pandemic. It seemed, therefore, that the proposed legislation was limited to companies in certain sectors, and would impose a restriction for landlords issuing statutory demands and presenting winding up petitions.
The CI&GB 2020 is much broader and restrictions in respect of statutory demands and presenting winding up petitions is to apply to all creditors, with retrospective effect. It is proposed that the restriction is temporary, but is to affect all statutory demands served from 1 March 2020 and 30 June 2020 and is to affect all winding up petitions presented from 27 April 2020 and 30 June 2020.
Even if the court has already made a winding up order it is proposed that the restriction will still apply, therefore the order will be void. It is proposed, however, that there are limited circumstances that a creditor can present a winding up petition. If the creditor can show coronavirus has not had a financial effect on the company then it is permitted to present a winding up petition. Showing that coronavirus had no financial effect on the company is likely to give rise to disputes, and the test is the creditor having reasonable grounds for belief or the court being satisfied. Winding up companies during the coronavirus period will be incredibly difficult. If a creditor presents a petition it must not be advertised “until such time as the court has made a determination in relation to the question of whether it is likely that the court will be able to make an order” winding it up, in light of the new restrictions.
The process of winding up is certainly going to be more complex and costly for the creditor but it is a change that will protect companies during times of what will hopefully be a temporary financial difficulty. However, it could result in the creditor receiving much less of a distribution should the debtor have to enter into a process at a later date. It may be that more consensual arrangements are reached during these times and whilst trying to restart the economy this is likely to be welcomed.
Should you have any questions regarding the above information, or need any Corporate Restructuring and Recovery advice, please get in contact with Suzanne Jones, at [email protected] or on 020 7725 8019, or your existing Seddons contact.