UK Corporate Insolvency and Governance Act 2020: Covid-19 update and implications for company directors
3rd August 2021
In March 2021, the government extended temporary insolvency measures to aid businesses in dealing with the current and continuing disruption caused by the pandemic. The measures so far have avoided a big spike in insolvencies and the extension of relief aims to continue this.
Temporary measures in the Corporate Insolvency and Governance Act 2020
The new Corporate Insolvency and Governance Act contains permanent measures updating the insolvency regime as well as a number of temporary measures designed to help businesses weather difficulties arising from the pandemic. Two of the temporary measures have been extended, while a third has ended.
Restrictions on the issues of statutory demands and winding-up petitions
Introduced to support the moratorium on commercial lease forfeiture, restrictions on issuing statutory demands and winding up petitions have been extended until 30 September 2021.
The law prevents a winding-up petition from being presented to a company based on a statutory demand that was made between 1 March 2020 and 30 September 2021.
Furthermore, a winding-up petition cannot be issued during that period where it is based on a company’s inability to pay its debts unless:
· The creditor has a reasonable belief that Covid-19 has not had a financial effect on the debtor; or
· The company would have been unable to pay its debts even if Covid-19 had not affected the company.
Suspension of wrongful trading
Wrongful trading was suspended temporarily until 30 June 2021, meaning that wrongful trading rules are now back in force.
While the suspension was in force, courts and insolvency practitioners were to assume that a director was not responsible where a company’s financial position had worsened. All other checks and balances on directors remained in force.
Moratorium on the forfeiture of commercial leases
While not part of the Corporate Insolvency and Governance Act measures, another aid to businesses comes in the form of a moratorium on the forfeiture of commercial leases, currently extended until 25 March 2022, and found in the emergency Coronavirus Act 2020.
The moratorium applies whatever the reason for non-payment of rent during the period of the moratorium, with some minor exceptions. Although the landlord cannot evict the tenant, rent and interest will continue to accrue and be payable.
Implications for directors
Statutory demands and winding-up
For companies with outstanding debts, the extension on statutory demands and winding-up petitions will offer respite for the time being. Directors should be aware however that the restriction only exists where the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor. This means that pre-pandemic debts relating to the period before 1 March 2020 may not be covered by the restriction.
Where a creditor reasonably believes that the debtor was unable to pay their debts at that time or would have become insolvent anyway, a winding-up petition may still be possible.
As from 1 July 2021, directors can potentially face wrongful trading allegations following the ending of the temporary relaxing of the rules.
Directors could be held personally liable in the following circumstances:
· Where they continued trading while they knew or should have concluded that there was no reasonable prospect of avoiding insolvent winding-up or administration;
· Where after this point they failed to take all steps that a reasonably diligent person would take to try and minimise losses for the company’s creditors.
To comply with the rules and mitigate risks and losses, directors should take care to keep careful records and seek professional advice on options for avoiding insolvency and safeguarding the business and its assets. The following will help them demonstrate reasonable care when dealing with difficulties:
· Having regular meetings of the board of directors to discuss decisions and the current state of the business. Keeping detailed records of the conversations will help show their thinking and why particular strategies were decided upon.
· Keeping detailed financial records, to include forecasts and analysis of the business’s liquidity so that risks can be spotted early.
· Looking at possible opportunities to avoid insolvency or administration such as restructuring. The Corporate Insolvency and Governance Act includes new permanent measures that may help, including a moratorium on creditor action to give a business breathing space to plan a rescue and a new court-supervised restructuring process.
· Seeking professional help early on as soon as difficulties are identified. Business experts, to include solicitors specialising in business rescue, restructuring and insolvency will be able to suggest a way forward. Alternatively, if there is no reasonable hope for the business, involving a professional can help start an orderly administration or liquidation.
Facing the future
As the government’s temporary measures start to reach their end, businesses will need to look at ways to ensure viability without outside support. The assistance saved a substantial number of companies from winding-up, but for some, it may be a temporary reprieve.
For businesses who are unsure of what the future holds, professional advice from a company and commercial expert can help to define ways of coping with continuing uncertainty and financial difficulties until profitability returns.
Get in touch with us
At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. If your organisation needs help adjusting as the law continues to change and government assistance is withdrawn, we will be happy to discuss your options with you.
Our advice is commercially focused and we will take the time to understand your business so that we can tailor our recommendations to suit your needs exactly. We can work out the best route forward and support you in putting the right legal framework in place.
If you are a creditor who is owed money by a business, we can talk you through the choices you have and help you plan an approach to recovering your funds.
We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
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The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.