Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

The Corporate Insolvency and Governance Bill [HC 2019-21] was introduced in the House of Commons on 20 May 2020, the Bill is expected to have its Second Reading on 3 June 2020. The Government intends to ask Parliament to expedite the parliamentary progress of the Bill. Justification for fast-tracking the entire Bill is based on the view that the measures are urgently needed to support businesses during the current Coronavirus crisis, to give viable companies the flexibility and breathing space they need to continue trading.

Due to the global outbreak of Covid-19, and national lockdown, many otherwise economically viable businesses are experiencing significant trading difficulties. Serious commercial consequences include a fall in consumer demand, delays in delivery of essential supplies, and cashflow issues. Some businesses (e.g. retail and hospitality) have been forced to stop trading altogether. Insolvency statistics, including the impact of coronavirus on UK businesses, are provided at section 7 of this paper.

The Government previously consulted on changes to the corporate insolvency regime and in August 2018 announced plans to introduce new insolvency restructuring measures. On 28 March 2020, the Business Secretary, Alok Sharma, announced that the Government would introduce these measures at the earliest opportunity together with temporary Covid-19 related measures intended to help companies avoid insolvency. On 23 April 2020, the Government announced other measures to protect companies from the aggressive use of statutory demands and winding petitions, particularly by commercial landlords.

The Bill’s overarching objective is to support businesses during the pandemic and maximise their chances of survival, protect jobs and support the country’s economic recovery. The Bill consists of eight measures which conveniently fall into two sets: permanent changes to insolvency law and temporary changes to insolvency law and corporate governance.

The Bill’s permanent measures would add a new corporate restructuring package to insolvency law. This set of measures (previously announced by the Government, and in development before Covid-19) consists of the following:

• Introduction of a free-standing moratorium for UK companies.
• There is currently no free-standing moratorium available to UK companies. The Bill would give struggling businesses a formal “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium no creditor action could be taken against the company without leave (i.e. permission) of the court. The moratorium would be overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company would remain with the directors (in effect, a “debtor in possession” process).
• Creation of a new Restructuring Plan. A new procedure to help viable companies struggling with debt obligations to restructure. It allows the court to sanction a restructuring plan that binds creditors if it is “fair and equitable” and in the interests of creditors. In other words, creditors vote on the plan, but the court can impose it on dissenting creditors (“cross-class cram down”).
• Widening of the “ipso facto” suspension provisions. When a company enters an insolvency or restructuring procedure, suppliers will often stop supplying the company. Ipso facto (or termination) clauses in the supply contract give them the right to do this. Under the Bill, suppliers would not be able to jeopardise a rescue in this way. The Bill includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the Covid-19 emergency.

The aim of the Bill’s temporary measures is to support businesses during the pandemic, help them to avoid insolvency and survive as a going concern. They would all have retrospective effect. This set of measures consists of the following:

• Temporary suspension of wrongful trading. The Bill would temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the Covid-19 crisis, with the uncertainty that the company may not be able to avoid insolvency in the future. However, all the other checks and balances on directors would remain in place. The measure would apply retrospectively from 1 March 2020.
• Temporary suspension of statutory demand provisions and a restriction on winding-up petitions (2 measures). The Bill would temporarily remove the threat of winding-up proceedings where the unpaid debt is due to Covid-19. The restriction period would apply retrospectively from 27 April 2020. It would also introduce temporary provisions to void statutory demands issued against companies during the emergency (from 1 March 2020). The aim is to give businesses the opportunity to reach realistic and fair agreements with all creditors.
• Flexibility on holding Annual General Meetings (AGMs) and other meetings. The Bill would temporarily allow those companies that are under a legal duty to hold an AGM to hold a meeting by other means even if their constitution would not normally allow it. Directors would not be exposed to liability for measures that need shareholder endorsement, and shareholders rights are preserved. This measure would apply retrospectively from 26 March 2020.
• Extending filing deadlines. The Bill provides for a temporary extension to the period allowed for the directors of a public company to comply with their obligation under section 441 of the Companies Act 2006 to deliver accounts and reports for a financial year to the Registrar at Companies House. The measure would apply retrospectively from 25 March 2020. In addition, the Bill would empower the Secretary of State to make regulations to extend the deadline for certain other filings at Companies House. This power would expire on 5 April 2021.

These are all time limited measures introduced to support UK companies during the Covid-19 crisis. Specifically, the suspension of wrongful trading liability, and statutory demands and winding-up petitions measures would expire on 30 June 2020 or one month after the coming into force of this Bill, whichever is the later. The AGM measure and the company accounts filing measure would both expire on 30 September 2020. However, some of these dates are extendable.

The Corporate Insolvency and Governance Bill is a large Bill and its insolvency provisions are technical and complex. This House of Commons briefing paper provides an overview of the Bill and information on how its provisions would affect existing legislation in this area. Information on the technical detail is available in the Explanatory Notes which accompanies the Bill.

The territorial extent of the Bill is, variously, the whole of the UK; England and Wales and Scotland; England and Wales only; Scotland only; or Northern Ireland only. A table in the Explanatory Notes provides a summary of the position and is reproduced in the Annex to this paper. An economic assessment and regulatory impact of the Bill’s temporary measures can be found in Annex B. An impact assessment on the permanent insolvency framework measures has been published alongside the Bill.

Useful links:

• Corporate Insolvency and Governance Bill 2019-21
• Corporate Insolvency and Governance Bill 2019-21: Explanatory Notes