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This News Analysis summarises the changes made to certain temporary provisions introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020).
CIGA 2020 received Royal Assent on 25 June 2020 and made a number of permanent and temporary changes to insolvency law.
A number of the temporary provisions were due to expire on 30 September 2020, but have been extended by secondary legislation to mitigate the economic effects of the coronavirus (COVID-19) pandemic:
• Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, SI 2020/1031
• Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020, SI 2020/1033
The following temporary measures introduced by CIGA 2020 have been extended:
• Winding-up petitions: temporary modifications concerning statutory demands and company winding-up petitions are extended to 31 December 2020. The effect is that winding-up orders continue to be unavailable where the company’s financial position has worsened in consequence of, or for reasons relating to, coronavirus unless the ground for making a winding-up order would be met even if coronavirus had not had a financial effect on the company.
The balance struck here between creditor and debtor is not an easy one. While it is generally accepted that businesses cannot avoid the consequences of their debts and escape the threat of winding-up indefinitely (particularly when their creditors may also be suffering financial hardship), the effect on businesses of social distancing, local lockdowns and rapidly changing government guidance and regulations makes it difficult for businesses to operate and manage their financial forecasts. The end of the restrictions on winding-up petitions will require the courts to make difficult assessments on the viability of businesses. With the volume of winding-up petitions currently significantly below pre-March 2020 levels, it seems likely that 31 December 2020 will become the new cliff edge for many companies.
• Moratoriums (Part A1 of the Insolvency Act 1986 (IA 1986)): to obtain a moratorium the monitor must be of the opinion that the company is likely to be rescued as a result. There is a temporary relaxation of this requirement where the company would likely be rescued as a going concern were it not for any worsening of its financial position due to coronavirus. The monitor is also able to disregard any worsening of the company’s financial position for reasons relating to coronavirus. This temporary relaxation is not being extended and ends on 1 October 2020. However, companies that are already subject to a moratorium or that have applied for a moratorium before that date will continue to benefit from the relaxation.
Other temporary relaxations in the entry criteria are being extended to 30 March 2021, including the provision allowing a company to obtain a moratorium where it has been subject to previous moratorium, administration or a company voluntary arrangement in the previous 12 months, and the provision allowing companies subject to a winding-up petition to obtain a moratorium by filing papers at court rather than making an application to court.
To date the moratorium procedure has only been used in a handful of cases. The strict entry criteria is likely a factor in its initial low take-up and the removal of the coronavirus exemption will make the entry threshold even higher. For further reading on the moratorium process, see Practice Notes:
- Corporate Insolvency and Governance Act 2020—moratorium
- Corporate Insolvency and Governance Act 2020—moratorium extension and termination
• Restrictions on termination/ipso facto clauses: temporary modifications excluding small suppliers from the effects of IA 1986, s 233Bare extended to 30 March 2021.
This extension protects suppliers rather than debtors and so is consistent with the government’s stated aim of supporting ‘viable’ businesses. For further reading on the restrictions on termination clauses, see Practice Note: Corporate Insolvency and Governance Act 2020—restrictions on ipso facto clauses
• Company meetings: a temporary modification concerning meetings of companies and other bodies is extended to 30 December 2020, allowing companies and other qualifying bodies with obligations to hold AGMs to continue to have the flexibility to hold these meetings virtually. For further reading on the temporary changes to company meetings, see News Analysis: Corporate Insolvency and Governance Bill—company meetings and company filings
Notably, there has been no extension of the temporary changes made to the wrongful trading regime, which will expire on 30 September 2020 as originally legislated for. These changes suspended a director’s liability for the financial consequences of wrongful trading during the relevant period (1 March 2020–30 September 2020) by stipulating that, when considering the contribution a director should make to a company's debts, the court should assume the director was not responsible for any worsening the company’s financial position.
The decision not to extend this provision appears to be a deliberate policy choice, perhaps linked to the government’s desire to support only viable businesses. However, while the renewed threat of wrongful trading will be a factor in directors’ decision making over whether to continue trading, the limited nature of the initial suspension and the low number of cases where wrongful trading is pleaded may mean that in practice the impact will not be significant.
For further reading on the temporary changes to the wrongful trading regime, see Practice Note: Corporate Insolvency and Governance Act 2020—temporary changes to the wrongful trading regime.
CIGA 2020, s 12(2)
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early termination of Certain Temporary Provisions) Regulations 2020, SI 2020/1033, reg 2
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, SI 2020/1031, reg 2(4)
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, SI 2020/1031, reg 2(3)
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, SI 2020/1031, reg 2(2)(b)
Termination clauses: Small suppliers are not bound by the restrictions on termination (Ipso Facto) clauses contained in IA 1986, s 233B
30 March 2021
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, SI 2020/1031, reg 2(2)(a)
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