Corporate Insolvency: Update

• Published date: 20 October 2020
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Corporate Governance, Insolvency/Bankruptcy
• Law Firm: Hill Dickinson
• Author: Mr Peter Speight

The Corporate Insolvency and Governance Act 2020 (the Act) received royal assent on 25 June 2020 and is now in force.

The current COVID-19 pandemic has placed a lot of companies registered in England and Wales into a position where they are now either balance sheet or cash flow insolvency or both. The loss of these companies to the economy would be catastrophic and as a result the UK Government started the Bill's passage through parliament on 3 June 2020. The Act is not perfect and there will be teething problems as we get to grips with its practical effects but its main aim is to provide companies with additional tools and breathing space to see them through their current financial difficulties and designed to provide short term relief from the effects of coronavirus.

The Act deals with both temporary measures that are necessary and linked to the COVID-19 pandemic as well as permanent measures. By way of outline, the various measures are set out below:

Temporary measures

1. Wrongful trading - Sections 12 and 13

Wrongful trading is when a director has been trading whilst a company is insolvent and has worsened the position for the company's creditors. In pre-COVID times a director could be found liable for the increase in creditor liability from the point of insolvency to the point an insolvency process was instigated and an insolvency practitioner appointed. The Act will reduce this liability and will assume that the director is not responsible for the worsening of the financial position of the company or the creditor position during the period 1 March 2020 to 30 September 2020.

2. Statutory demands and winding up petitions - Sections 10 and 11 and Schedule 10

These are actions taken by creditors to place a company into liquidation. The intention is to allow companies breathing space and prevent the threat of winding up proceedings being used as an aggressive debt collection tool and encourage communication and negotiation between parties.

The Act places a prohibition on petitions being prosecuted solely based on statutory demands served on debtors between 1 March 2020 and 30 September 2020. NB: We will shortly be providing an update to this note in light of the recent legislative changes regarding winding up petitions.

Further, the Act places a further hurdle on the creditor to set out clearly in any petition that (1) coronavirus has not had a financial effect on the company, or (2) the facts by reference to which the relevant ground to present a...