A fortnight ago, as the Corporate Insolvency and Governance Bill was making its way through Parliament, the Business Secretary Alok Sharma looked set to become the latest member of the cabinet to be infected by the coronavirus.
Thankfully for him, this was not the case. In the meantime, the Bill has not as yet received Royal Assent, but that day is edging ever closer. When it does, it will provide a considerable amount of new law for businesses and practitioners to add to their insolvency tool kit.
For the accountancy industry, it will be important to understand the application of the Bill to clients in distress. In some instances, this may be dependent on whether such all or part of such distressis as a result of COVID-19 disruption or if the business would have been at risk of insolvency regardless.
What is the purpose of the Corporate Insolvency and Governance Bill?
It is intended to stem the flow of potential business insolvencies, by giving breathing space to business debtors and their directors, and limiting the options of creditors to enforce their debts during the current pandemic. Some of the provisions are permanent, others are temporary.
Will the Corporate Insolvency and Governance Bill be effective?
It remains to be seen how effective these provisions will be. In terms of the moratorium preventing creditors from taking action for a specified period of time, so that a rescue or restructuring package is put in place, this legislation will be permanent. For many, a delay may turn out to be a better option than administration, and unlike administration it leaves the debtor in control. This may be a worthwhile option for a company that needs to relieve creditor pressure, provided that it is not abused so as to leave creditors even worse off.
An overview of some of the provisions of the Corporate Insolvency and Governance Bill
With the more temporary provisions, which currently run one month from commencement, there are restrictions on statutory demands and winding up petitions, as well as the relaxation of the need to seek a validation order (which clears bank payments) until a winding up order is made. However, a creditor can still wind up a company if they can show that its insolvency is not COVID-19 related.
There’s also the relaxing of the wrongful trading provisions, where company directors will not have to assume responsibility for the deterioration of the company’s solvency position from 1 March 2020 until the end of the statutory period. Taking into account other potential liabilities, for example breach of duty, and the assumption only applying from 1 March, directors of companies that were beyond saving before 1 March may not get much comfort from it.
Overall, if a business would have been trading solvently at the present time, but for COVID-19, the Bill will give some options for the business and its owners to seek protection from creditors and keep the business going. If the business was beyond redemption before Covid-19, the Bill should not be used as an instrument for abuse or a get out of jail free card. Either way, those who find themselves in this position should seek professional advice.
Stuart Evans, commercial litigation partner and specialist in insolvency disputes at law firm BLM