Alerts

Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 introduces a range of temporary measures designed to support businesses and directors affected by the Covid-19 crisis.

The measures include:

1. A moratorium for eligible companies to restrict the enforcement or payment of certain debts.

2. A new restructuring plan.

3. A prohibition on termination clauses as a result of a company entering an insolvency procedure, moratorium or restructuring plan.

4. A temporary prohibition on creditors filing statutory demands and winding up petitions.

5. Temporary suspension on the rules for wrongful trading.

6. Extended deadlines for filing accounts and Companies House filing deadlines.

We will be taking a deeper look at some of these measures in our alerts, starting with the moratorium:

The Act enables eligible companies, in certain circumstances, to obtain a moratorium to restrict the enforcement or payment of certain ‘pre-moratorium’ debts.  The moratorium will be for an ‘initial period’ of 20 business days but the period can be extended.

The company must continue to pay some debts during the moratorium period such as the monitor’s remuneration and expenses, goods or services supplied during the moratorium, rent in respect of a period during the moratorium, some payments to employees and debts/ other liabilities arising under a contract or other instrument involving financial services.

A company is not eligible for a moratorium if it is already subject to formal insolvency proceedings.  Financial service companies are also not eligible.

A company can enter a moratorium by the directors either (a) filing the relevant documents at court; or, in the case of an overseas company, (b) making an application to court.

The Court can make an order for a mortarium where a company is subject to an outstanding winding up petition if the Court is satisfied that a moratorium would achieve a better result for the company’s creditors as a whole rather than if the company were wound up.

The legislation divides debts into three categories:

1. pre-moratorium debt for which the company has a payment holiday:

2. pre-moratorium debt for which the company does not have a payment holiday: this is debts that have fallen due before or during the moratorium in respect of:

(a) the monitor’s remuneration or expenses;

(b) goods or services supplied during the moratorium;

(c) rent in respect of a period during the moratorium;

(d) wages or salary;

(e) redundancy payments; or

(f) debts or other liabilities arising under a contract or other instrument involving financial services.

The Act also refers to ‘priority pre-mortarium debts’ which are those with protection in a subsequent insolvency process.

3. Moratorium debts: any debt the company is subject to during the moratorium (except those falling under (2) above).

A company must continue to pay pre-moratorium debts without a payment holiday and moratorium debts during the mortarium period.

As debt or other liabilities arising under a contract or other instrument involving financial services are classed as pre-moratorium debts without a payment holiday the company will ultimately need support from lenders if the moratorium is going to be entirely effective. Failure to pay moratorium debts or pre-moratorium debts without a payment holiday will result in the moratorium being brought to an end.

During a moratorium, without permission of the court:

1. A landlord cannot exercise a right of forfeiture by peaceable re-entry

2. No steps may be taken to enforce any security over the company’s property (with the exception of steps to enforce a collateral security charge or security created otherwise arising under a financial collateral arrangement)

3. No steps may be taken to repossess goods under a hire-purchase agreement

4. No legal process (including proceedings) may be commenced or continued against the company (except for employment tribunal proceedings or similar)

A monitor must be appointed to monitor the company’s affairs and form a view as to whether it is likely that the moratorium will result in the rescue of the company as a going concern (not the business as a going concern).  The monitor’s role also includes sanctioning certain acts of the company.

The monitor will bring the mortarium to an end by filing a notice with the court, for a number of reasons including, if the monitor thinks the moratorium is no longer likely to save the company as a going concern.

The moratorium will come to an end if the company enters into another insolvency process or a restructuring plan, by order of the court or automatically at the end of the period.

If you have any queries, contact our Dispute Resolution and Litigation team on 01228 552600 or 01524 548494.

This alert does not provide a full statement of the law and readers are advised to take legal advice before taking any action based on the information contained herein.

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