UK: Corporate Insolvency

UK: Corporate Insolvency and Governance Act, 2020

The insolvency laws in the UK have undergone a complete overhaul with the introduction of the Corporate Insolvency and Governance Act 2020. The key measures introduced by the Act are as follows;

The Act has introduced a set of permanent and temporary measures; the temporary measures are concerned with relaxations and restrictions in accordance with the Covid-19 pandemic, these measures are;

1. Restrictions regarding winding up
2. Changes in wrongful trading rules
3. Relaxations regarding filing requirements and organization of meetings facilitating flexibility

The permanent measures being;

1. Restrictions regarding the termination of contracts
2. Changes in restructuring plans
3. Free-standing moratorium

Permanent measures

Moratorium

Moratoriums are generally enacted to ease companies of their financial hardships. A free-standing moratorium has been implemented for the sake of rescuing distressed companies and affording creditors to pursue a turnaround plan without the added costs. This provision focuses on the recovery of the company and prescribes an initial period of 20 business days subject to extension and early termination.

Restructuring plans

The Act prescribes for a court-supervised restructuring process; this can be used in accordance with the moratorium or exclusive of it. An entity undergoing financial difficulties may make an application to use the restructuring process. The process stresses on valuation so that creditors’ position can be assessed with regard to exclusion from the voting process.

Termination of contracts

Restrictions have been imposed on the termination of contracts of supply of goods and services. Suppliers will temporarily be barred from insisting on payments due; prior to insolvency. Certain temporary exclusions have been put in place until 30^th March 2021, in case of small suppliers.

Temporary measures

Winding-up

Creditors are barred from presenting winding-up petitions from 27^th April 2020 to 31^st March 2021, unless they can show that the pandemic has not had any material effects on the financial conditions on the debtor. Further, companies will also be protected from eviction from commercial properties.

Wrongful trading

The Act includes certain wrongful trading rules, as per the amendment these rules shall be temporarily suspended. This removes the liability imposed on the directors for trading through the pandemic. As per this provision, the director cannot be held liable for worsening of the company’s financial position for the period stipulated under the Act. However, provisions regarding fraudulent trading and disqualification of directors will continue to apply. The Act continues to impose the exception on directors to act in a manner that is reasonable and prevents losses.

Filing and meetings

The Act permits extension of deadlines and includes provisions for the relaxation of government restrictions that would make it easier for public and private companies to conduct meetings.