Corporate Insolvency and Governance Bill: Company law in the time of COVID-19

29 Jul 2020

The Corporate Insolvency and Governance Bill offers directors of struggling companies with some welcomed respite in regards to some of their decisions and action during the COVID-19 period. There is relief available with regards to personal liability for wrongful trading, voluntary moratoriums and restructuring options.

Wrongful trading

The impact of the COVID-19 escalated quickly in March 2020, and directors at that time were met with making difficult and unprecedented decisions in order to keep companies afloat.

Many businesses were admirably quick to adapt, and continued to trade in the best way they could despite the challenges, in an industrious and entrepreneurial spirit. The Bill provides directors with some comfort that fact that they will not be punished for genuine efforts to keep companies trading during these unprecedented times. For the period 1 March 2020 to 30 September 2020, the Court will assume that a director is not responsible for any worsening of the financial position of the company, including any impact to its creditors. This substantially eases the position for directors who have allowed a company to continue trading during lockdown, although certain corporate entities are excluded (most notably banks, insurance companies and financial services firms).

It is important to note that this is not a complete “get out of jail free” card (metaphorically or literally). Directors continue to hold the same fiduciary and legal duties, most notably to act in the best interests of the company, and the Bill makes no changes to liability for fraudulent trading.

It is yet to be seen whether the government will further extend this relief for directors, given the overall proposed changes which have been tabled in this area.

Temporary voluntary moratorium

Another tool available for directors, which will be permanently available moving forward, is the option of a temporary moratorium introduced by the Bill. A company currently unable or likely to be unable to pay its debt will be able to approach a ‘monitor’ to provide a statement as to its eligibility and then file for a 20 business day moratorium. This provides some breathing space to consider possible restructuring options (though no appointment can be made) or to obtain further investment without such a prominent threat of creditor action.

However, companies will be obliged to continue paying certain key debts including rent, wages, redundancy payments, loan repayments, and payment for goods and services received during the moratorium. In the event the assigned monitor does not consider the company can pay these debts, the moratorium will cease.

Directors should also be aware that there are restrictions on what action they can take during a moratorium without the consent of the Court.

This introduction by the Bill is a positive step to allowing a company in financial distress some time in order to seek possibilities in rescuing the company as a going concern, and is a mechanism for directors to seek to rescue the company, rather than an Insolvency Practitioner (albeit is likely that the monitor will be an Insolvency Practitioner) It should also minimise the economic impact of businesses suddenly becoming insolvent and ceasing to trade. It is a useful addition of options open to directors, and they should seek specific advice as to the merits of utility the moratorium or other options.

In the final part of our series on the Corporate Insolvency and Governance Bill 2020, we take a look at the effect of the Bill on supply chains.

Please follow the links below to read more in our three part series about the new Corporate Insolvency and Governance Bill:

If you require assistance in relation to the Bill, please contact Jennifer Bowes or Maxine Nutting on 023 8032 1000 or get in touch here.

Author

Jennifer Bowes

Partner