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The Corporate Insolvency and Governance Act 2020 (“the Act”) came into force on 26 June 2020. The main objective of the Act was to amend insolvency and company law in order to support companies through the coronavirus pandemic.

The Act introduced a mix of permanent and temporary changes to the restructuring, insolvency and corporate governance regime in the UK.  The permanent changes, the moratorium and restructuring plans, focus on an effort to encourage the restructuring of companies in the hope that they can be rescued. Whereas the temporary measures are a form of crisis control introduced in order to try and curb the immediate impact of the pandemic by restricting debt recovery tools during what was seen at that point as the critical time for companies suffering as a direct result of the constraints on business. 

Both the permanent and temporary measures introduced by the Act were discussed in some detail during our CIGA Article Series published last summer and are available here. The temporary measures include:-

  • Exclusion of small suppliers from the termination of supply contracts. The Act introduced a permanent change that prevents suppliers terminating supply contracts when a company enters into an insolvency procedure. However, the Act had a temporary exemption for qualifying small suppliers which would permit them to terminate the supply contract.
  • Temporary suspension of wrongful trading. This reduced the threat of Directors’ personal liability arising from wrongful trading.
  • Temporary relaxation of corporate governance measures. This relaxed the normal rules surrounding shareholder meetings and Companies House filing requirements.
  • Prohibition on winding up petitions based on statutory demands served during the relevant period. This prohibits a winding up petition from being presented on the basis of an unsatisfied statutory demand served during the relevant period.
  • Prohibition on the presentation of winding up petitions in the relevant period. This prohibits creditors from presenting winding up petitions, based on the company’s inability to pay its debts, unless certain strict conditions are met. This seriously restricts the action that can be taken by creditors to enforce the recovery of debts. It is a measure that has been utilised throughout the pandemic to protect companies from insolvency.
  • Relaxed entry requirements to the new moratorium procedure under the Act. During the relevant period Companies can enter into a moratorium even if they had been subject to an insolvency procedure in the previous 12 months. Similarly, there is an easing of access to the moratorium procedure for companies that are subject to a winding up petition.

The relevant period for the purpose of the Act commenced on 1 March 2020 and it was intended to last until 30 September 2020. However, on 24 September 2020 some of the temporary measures were extended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020, including:-

  • The prohibition on winding up petitions based on statutory demands was extended until 31 December 2020.
  • The prohibition on the presentation of winding up petitions was extended until 31 December 2020
  • The exclusion of small suppliers from the termination of supply contracts was extended until 30 March 2021.
  • The relaxed entry requirements to the new moratorium procedure were extended until 30 March 2021.

The temporary measures which related to wrongful trading were not extended in September 2020. However, on 26 November 2020, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations came into force, which have reinstated the suspension of the temporary measures in relation to wrongful trading until 30 April 2021.

On 9 December 2020, the Government announced that the temporary measures were to be further extended by way of The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No.2) Regulations 2020, namely:-

  • The restriction on relying on statutory demands and serving winding-up petitions was extended to 31 March 2020.
  • The temporary exemption for qualifying small suppliers from the termination of supply contracts has been extended until 30 March 2021.
  • The modifications to the new moratorium procedure, which relate to the relaxation of entry requirements to it, have also been extended until 30 March 2021.

The extensions to the protective measures of the Act are indicative of the continuing crisis caused by the pandemic. Whilst these measures have been extended and will remain in place until the spring there is no guarantee that they will not be extended further.  Any further extensions will continue to protect business through this challenging time but will also have a direct impact on creditors attempting to recover debts.

One of the big questions around the measures is whether or not they have been effective in protecting business.  In December 2020, there were 57 company insolvencies registered in Scotland, 36% lower than in December 2019[1], indicating that the measures are succeeding in protecting companies at present. However, as the Coronavirus Pandemic continues, companies must consider whether these measures will benefit them in the long run. The measures do not deal with the fundamental issue of debt, and therefore do not provide a solution for debtors for when the restrictions expire.  

If you are concerned about the impact that the ongoing restrictions may have on your business or conversely what might happen as a result of any relaxation in the restrictions please contact our restructuring and insolvency team who would be happy to discuss the relevant issues with you in greater detail.

 

[1] Monthly Insolvency Statistics, December 2020 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/952552/Monthly_Insolvency_Statistics_December_2020.pdf (last accessed 27/01/2020)

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