Corporate Insolvency and Governance Bill severely limits debt collection

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3 min read

As the coronavirus pandemic gathered pace in March, the Government proposed a series of radical reforms to the corporate insolvency regime, which has largely remained unaltered for 20 years. We now have details of how significant an impact these reforms will have on creditor and supplier rights.

Temporary provisions to deal with coronavirus 

First and foremost, a package of temporary provisions designed to cushion struggling business from the financial impact of the coronavirus pandemic will be introduced including: 

  • Voiding statutory demands served between 1 March and 30 June – effectively preventing debt collection via insolvency process, albeit proceedings can still be issued.
  • Adding hurdles to winding up petitions presented before 30 June – it will still be possible to present winding up petitions on other grounds during that time, but a creditor must have reasonable grounds for believing that coronavirus had not had a financial impact on the company or that the fact giving rise to the grounds would have still existed even if the coronavirus had a financial impact. This will undoubtedly be difficult to make out or give sufficient scope for delay and dispute to question whether this is worthwhile. 
  • There will be a presumption that, for the purposes of wrongful trading, a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during this period, which may give directors the confidence they need to keep the business going (although, as we have previously flagged, that confidence could still be misplaced).

Contrary to the many media reports in April, this is not limited to landlords collecting in rent, although that was clearly the headline grabber. Any creditor owed money by companies struggling as a result of the pandemic will find their rights restricted (at least on a temporary basis).  The clear policy line is that aggressive debt collection is off limits, at least until the end of June, and a creditor who does proceed does so at their own risk.  

Wider reforms 

There are also further reforms included with the Bill, which we shall explore separately. The key details though are: 

  • The introduction of a new 20 business day moratorium (potentially extendable by up to a year), monitored by an insolvency practitioner to allow the company to consider a rescue plan. Currently there are moratoriums available to consider a CVA but they are rarely used. 
  • Providing that contractual termination clauses which kick in on insolvency events will be unenforceable if a company enters an insolvency process, including the proposed moratorium – currently this is restricted to certain essential supplies but this proposed change will broaden that and bring the UK in line with other jurisdictions (including the US). 
  • The introduction of a new restructuring plan procedure. This would operate like a scheme of arrangement, but critically could bind one or more dissenting classes of creditors or shareholders, which a scheme of arrangement cannot do. These might have potential in more complex debt restructures to prevent creditors “out of the money” blocking an otherwise viable restructure. 

These changes will expand the restructuring toolkit available – hopefully for the better as struggling businesses seek to navigate the consequences of the coronavirus pandemic. 

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