Changes to Coronavirus Provisions under the Corporate Insolvency and Governance Act 2020

United Kingdom

The UK Government has issued secondary legislation extending the period of applicability of certain temporary provisions of the Corporate Insolvency and Governance Act 2020 (“CIGA”). The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 (the “Extension Regulations”), which come into force on 29 September 2020, extend the “relevant period” (previously expiring on 30 September 2020) during which certain temporary modifications to CIGA, largely intended to provide breathing space to companies during the coronavirus pandemic, apply. The length of extension of the relevant period varies between the provisions.

Unusually, a further set of regulations, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020 (the “Termination Regulations”) was laid before Parliament the day after the Extension Regulations had been, and bring certain temporary coronavirus provisions under CIGA to an end on their original expiration date, despite their having been extended by the Extension Regulations. The explanatory note to the Termination Regulations states that this seemingly anomalous situation is in fact as intended, with the purpose of carving out certain provisions from the Extension Regulations. The Termination Regulations come into force on 1 October 2020.

The new regulations coincide with the announcement of the Government’s new Job Support Scheme and the extension of Government-backed borrowing schemes and restrictions on leasehold enforcement, in the context of tighter restrictions on movement and certain business operations. The key provisions, as extended or terminated, are outlined below.

Supplies of goods and services by small suppliers

Under CIGA s 14, a supplier of goods and services may not, where a recipient counterparty enters an insolvency process, terminate the supply contract (nor do any other thing) by reason of a provision relating to the insolvency of the counterparty, or by reason of an event occurring before the counterparty’s insolvency (an ipso facto provision). The prohibition is subject to certain exemptions, including a temporary exemption for small suppliers (defined by reference to the turnover, balance sheet and/or employee head count of that supplier); this small supplier exemption will be extended by the Extension Regulations to terminate on 30 March 2021. 

Moratorium

The new moratorium procedure introduced by CIGA is subject to certain temporary modifications applicable during the relevant period, to be extended by the Extension Regulations to 30 March 2021. In outline, the modifications subject to extension provide that:

  • directors of a company subject to an outstanding winding-up petition must use the out-of-court filing process to obtain a moratorium, rather than an application to the court (Sch 4, para 6(1)(a)); and
  • companies that have been subject to an insolvency procedure in the preceding 12 months are eligible for a moratorium (Sch 4, paras 6(1)(c), 7(c)).

The explanatory notes to the Extension Regulations reiterate that the existing procedural rules relating to the operation of the moratorium are subject to finalisation.

Under the Termination Regulations, certain temporary provisions will end on 30 September as originally intended despite, in certain cases, having just been extended by the Extension Regulations). From 1 October:

  • certain companies carrying on regulated financial activities which were ineligible for a moratorium (CIGA Sch 4, para 5) will now be eligible;
  • on an application for a moratorium, the necessary statement by the proposed monitor that the moratorium is, in the monitor’s opinion, likely to result in a rescue of the company as a going concern will no longer be qualified by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus” (Sch 4, paras 6(1)(b), 7(a)) (the “Coronavirus Exception”); and
  • modifications to CIGA under which the Coronavirus Exception applied to certain aspects of moratorium procedure will no longer apply in relation to: applications for extension of a moratorium (Sch 4, para 8); the monitor’s assessment of the likelihood that a moratorium will rescue a company as a going concern (para 9); and termination of a moratorium because, in the monitor’s opinion, the going concern test is no longer met (para 10).

The modifications brought about by the Termination Regulations do not apply to moratoria that were already in force, or in relation to which an application to the court has been made but not disposed of, before 1 October.

Restrictions relating to statutory demands and winding-up petitions

The relevant period in respect of restrictions on use of statutory demands and winding-up proceedings has been extended to 31 December 2020. In brief, the extended restrictions provide that:

  • no winding-up petition may be presented in reliance on an unsatisfied statutory demand served during the relevant period (which commenced on 1 March 2020) (CIGA Sch 10, paras 1, 2); and
  • no winding-up petition may be presented by a creditor on the basis that a company is unable to pay its debts, unless that creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company, or that the company’s inability to pay would have arisen even if coronavirus had not had a financial effect on it (Sch 10, paras 2, 3).

The explanatory note to the Extension Regulations acknowledges that the comparatively short extension of the relevant period in respect of statutory demands and winding-up petitions reflects the fact that the prohibitions represent “a significant intervention into the normal working of insolvency law”.

General meetings of companies

The relaxation of requirements for general meetings to be held in person are extended to 30 December 2020 (CIGA Sch 14, para 3).

Suspension of wrongful trading liability

The suspension of liability for wrongful trading under CIGA s 12(2) is not being extended and will lapse on 30 September 2020. While the explanatory notes to the Extension Regulations do not give a reason for allowing the suspension to come to an end, there had been questions over how much protection, in reality, the suspension of liability for wrongful trading offered directors of companies in financial distress, given that the duty itself, if not the liability, remained intact. In addition, the general duty to have regard to the interests of creditors where a company is or is likely to become unable to pay its debts remained in place, as well as the misfeasance and fraudulent trading regimes. Directors could also still be subject to disqualification proceedings and compensation orders if adverse reports were filed on their conduct.