Unravel the complexities of the Corporate Insolvency and Governance Act 2020 in our latest article. This key legislation marks a pivotal shift in UK company law, offering much-needed support to businesses in the face of the pandemic.
In the ever-evolving world of UK company law, a significant development has been the introduction of the Corporate Insolvency and Governance Act 2020. The Act, the most substantial change to the UK’s corporate insolvency regime in over 20 years, was fast-tracked through Parliament in response to the COVID-19 pandemic. Its primary aim is to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time.
A central aspect of the Act is the introduction of a new moratorium procedure. This gives companies formal breathing space to pursue a rescue plan free from creditor action. The directors remain in control of the business (known as ‘debtor-in-possession’), but an insolvency practitioner acts as a ‘monitor’ to oversee the process and protect creditors’ interests. This procedure marks a departure from traditional UK insolvency procedures, which are ‘creditor-in-possession’ and involve an insolvency practitioner taking control of the business.
The Act also introduces a new restructuring plan. Similar to existing schemes of arrangement, it allows companies to restructure their debts with the approval of 75% in value of the creditors. Unlike schemes of arrangement, however, the restructuring plan introduces a ‘cross-class cramdown’ feature, which allows dissenting classes of creditors to be bound by the plan, subject to court approval. This offers companies greater flexibility in restructuring their debts.
Another key feature of the Act is the temporary suspension of wrongful trading provisions, aimed at enabling directors to continue trading through the COVID-19 pandemic without the threat of personal liability. This provision, however, does not absolve directors of their broader duties under the Companies Act 2006, and they must continue to act in the best interests of the company.
In addition, the Act introduces a prohibition on contractual termination clauses that are triggered by insolvency. Suppliers will not be able to terminate supply contracts or increase charges solely because the customer has entered into an insolvency or restructuring procedure, ensuring companies have continued access to supplies.
While the Act has been largely welcomed as a lifeline for businesses affected by the pandemic, it also presents challenges. Creditors, particularly landlords and suppliers, will need to navigate the new procedures and temporary restrictions. Furthermore, despite the suspension of wrongful trading provisions, directors must tread carefully to ensure they fulfill their broader statutory duties.
In conclusion, the Corporate Insolvency and Governance Act 2020 has brought about significant changes to the UK’s corporate insolvency regime, providing much-needed relief for companies during the COVID-19 pandemic. As the UK business landscape continues to grapple with the impacts of the pandemic, the Act serves as an important tool in supporting business resilience and recovery.