Corporate Insolvency & Governance Act

Published date06 July 2020
Subject MatterCorporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Corporate Governance, Insolvency/Bankruptcy
Law FirmWalker Morris
AuthorWalker Morris

Looking to the future with a new UK insolvency regime

The Corporate Insolvency and Governance Act 2020 (the Act) promises to bring into effect a mixture of temporary measures to alleviate the problems created by the Covid-19 pandemic and some permanent reforms to the UK restructuring and insolvency regime.

Temporary Covid-19 measures

The Act introduces temporary changes to two important aspects of the insolvency regime; wrongful trading and statutory demands.

Wrongful trading

In the UK a director can be held financially liable for wrongful trading if he knew, or ought reasonably to have known, that there was no reasonable prospect of the company avoiding insolvency and did not take every step to minimise the potential losses to the company's creditors.

Although it was announced by the Government that the wrongful trading provisions would be temporarily suspended, in fact the Act instead removes liability from the directors for any worsening of the financial position of the company or its creditors that occurs between 1 March and 30 September 2020. Thus a court can still find that wrongful trading has occurred but will not ask the directors to contribute to the company's assets as a consequence. This temporary change means that although directors should still take every step to minimise losses to creditors, they are unlikely to be found personally liable if they are subsequently found to have wrongfully traded.

As explained above, these provisions do not really amount to a full suspension of the wrongful trading regime but instead effect an adaptation, making liability very unlikely during the relaxation period. Notwithstanding this temporary suspension, directors need to be aware that they remain subject to fiduciary duties under the Companies Act 2006 and may still incur other forms of statutory liability such as liability for fraudulent trading. In addition, directors can still be found liable under the compensation order regime whereby the Insolvency Service can apply to court for a compensation order where a director has been disqualified and their behaviour has caused a quantifiable loss to creditors of an insolvent company. Compensation orders may become more prevalent to prevent (or punish) behavior that abuses the relaxation of wrongful trading.

Statutory demands and winding up petitions

The Bill places temporary restrictions on the circumstances in which a creditor can bring a petition to wind up a company. Creditors are not able to bring winding...

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