The Corporate Insolvency and Governance Act received royal assent on 25 June 2020 and comes into force immediately.

The Act introduces a range of new corporate restructuring tools and suspends, temporarily, parts of the existing insolvency regime. The purpose of this note is to update you on two key aspects of the Act: the moratorium on legal action and the temporary changes in relation to statutory demands and winding-up petitions.

Moratorium on legal action

The Act establishes certain circumstances in which companies can obtain the benefit of a moratorium on legal action, giving companies various protections from creditors.

Where an ‘eligible’ company is not subject to an outstanding winding-up petition and is not an overseas company, it may obtain a moratorium by filing the necessary documents with the Court: these include, amongst other things, a statement from the ‘proposed monitor’ that the company is an eligible company and a statement from the directors that, in their view, the company is or is likely to become unable to pay its debts. 

A company is ‘eligible’ to apply for a moratorium unless it is excluded by any of the provisions in Schedule ZA1, as inserted into the Insolvency Act 1986. For example, a company is excluded from eligibility if:

• on or during the 12 months prior to the filing date for a moratorium, the company is or was subject to an insolvency procedure;
• the company carries on the regulated activity of effecting or carrying out contracts of insurance and is not an exempt person (within the meaning of the Financial Services and Markets Act 2000);
• the company is a banking group company (within the meaning of Part 1 of the Banking Act 2009);
• the company is an investment bank or investment firm.

The ‘monitor’ in relation to a moratorium is an officer of the Court and is responsible for monitoring the company’s affairs so as to form a view whether the moratorium will result in the rescue of the company as a going concern. A monitor must be a person qualified to act as an insolvency practitioner.

The moratorium comes into effect upon the filing of the relevant documents, which triggers the notification obligations of the monitor. It will last for an initial period of 20 business days unless extended or ended earlier.

The effect of the moratorium is to impose restrictions on a creditor’s ability to commence insolvency and legal proceedings and enforcement action, as well as on the company in relation to its transactions, payments and disposals of property. Critically, a moratorium will prevent creditors from:

• presenting a winding up petition;
• passing a resolution for voluntary winding up of the company;
• taking steps to enforce any security over the company’s property except in limited circumstances;
• instituting, carrying out or continuing any legal process against the company except in limited circumstances.

The purpose of these provisions is to give companies experiencing financial difficulties time to consider rescue and restructuring options.

Freeze on winding-up petitions

Schedule 10 of the Act introduces a temporary prohibition on winding-up petitions arising from coronavirus-related debts. The objective of the freeze is to give struggling businesses short-term relief from the threat of being wound up for non-payment as a result of COVID-19.

Businesses should be aware that even though the Act came into force on 26 and 27 June 2020, most of the provisions concerning statutory demands and winding-up petitions are to be treated as having effect from 27 April 2020.

The effect of Schedule 10 is that:

• a creditor may not present a winding-up petition:
• in relation to a registered company, for failure to satisfy a statutory demand on or after 27 April 2020, where the statutory demand was served between 1 March and 30 September 2020 (inclusive);
• in relation to an unregistered company, for failure to satisfy a statutory demand, where the statutory demand was served between 1 March and 30 September 2020 (inclusive);
• unless the creditor has reasonable grounds for believing that:
  • coronavirus has not had a financial effect on the company; or
  • depending on the particular provision relied upon by the creditor in the Insolvency Act 1986:
    • the facts by reference to which the relevant ground for winding-up applies would have arisen even if coronavirus had not had a financial effect on the company; or
    • the relevant ground would apply even if coronavirus had not had a financial effect on the company.

Retrospective effect

These changes have retrospective effect: winding up orders on the grounds of inability to pay a debt (i.e. under section 122(1)(f) or 221(5)(b) of the Insolvency Act 1986) made on or after 27 April 2020 but before commencement of Schedule 10, which the Court would not have made had Schedule 10 been in effect at the time, will be regarded as void. Schedule 10 contemplates that the Court will give any necessary directions for the purpose of ‘restoring’ the company to the position it was in immediately before the petition was presented.

‘Financial effect’

Schedule 10 provides that coronavirus has a ‘financial effect’ on a company if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus. That is necessarily but unhelpfully broad and gives the Courts significant flexibility in determining whether or not coronavirus has had the requisite ‘financial effect’ so as to permit a company to avoid the usual consequences of a winding-up petition.

Conclusion

Both the moratorium and temporary prohibition on winding-up petitions will no doubt assist in giving businesses both short and long-term relief from the threat of winding-up and other insolvency and legal proceedings.

Notably, in relation to the freeze on winding-up petitions, the Act puts the onus on the creditor to demonstrate that coronavirus has not had an effect on the debtor organisation. Given the broad definition of ‘financial effect’, that is likely to be difficult to discharge. It remains to be seen how the Courts will deal with winding-up orders made prior to the Act coming into effect and whether, in practice, this will have a real impact on businesses.