Opinions and insights from Roythornes' corporate and commercial law team.
The Corporate Insolvency and Governance Act 2020
- AuthorJulia Seary
The Corporate Insolvency and Governance Act 2020 came into force on 25th June 2020, with the aim of “Relieving the burden on businesses during the Coronavirus outbreak.”
- Provides companies with temporary easements on Companies House filings and registrations,
- Allows more flexibility around when and how annual general meetings are held,
- Introduces new corporate restructuring tools to the insolvency and restructuring regime, and
- Temporarily suspends parts of insolvency law.
COMPANIES HOUSE FILINGS
On 27th June 2020, the Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020 (the Regulations) came into force to temporarily ease burdens on businesses by extending filing deadlines at Companies House. The Regulations mean that for a temporary period, private companies and other entities will have more time to file accounts, confirmation statements and notices of certain relevant events.
Where a private company or LLP has not had an extension or shortened the accounting reference period, the filing deadline is extended from 9 to 12 months.
If the private company has already had an extension, it will be eligible for a legislative extension if the filing deadline falls on or before 5th April 2021. However, the extension granted by the Regulations will apply to the company’s original filing deadline – it will not be added to the filing extension already granted by Companies House.
If the private company’s accounting reference period has been shortened, the deadline will be extended to the later of: the new period of 12 months from the accounting reference date, or 3 months from the date of the notice to shorten the accounting reference period.
If a private company’s first accounts cover a period of 12 months or less, and the company has not received an extension, the filing deadline will be extended from 9 months to 12 months. If a private company’s first accounts cover a period of more than 12 months, then the filing deadline will now be 24 months from the date of incorporation.
Companies and other types of business registered at Companies House will also get more time to file their confirmation statement. The current 14-day deadline – from the end of the review period – will be extended to 42 days. This is an automatic extension and companies do not need to apply for more time.
The extension applies to the time allowed to file the confirmation statement at the end of the company’s review period i.e. the period that the confirmation statement covers. It does not alter the review period and so the confirmation date on the confirmation statement should not be amended.
Companies will also get more time to file details of certain events. In particular, this includes any changes that a company is required to file before the confirmation statement. The period allowed to deliver details of the event will increase to 42 days. For companies, the events include:
- Changes to details of directors,
- Information on people with significant control (PSCs) and secretaries,
- Changes to registered office address,
- Notification of place where registers of members, directors, PSCs and secretaries are kept, and
- Notification of a place where copies of instruments creating charges are kept.
This is a temporary measure meaning that the filing deadline extension will not apply where the deadline for filing falls on 6 April 2021 or later.
The period allowed to deliver the particulars of a charge to Companies House has increased by 10 days. Currently, a person with an interest in the charge has 21 days to deliver their documentation to Companies House. For charges created on or after 6 June 2020, the period to deliver the particulars of a charge will automatically increase to 31 days. This 31-day period will start the day after the date the charge was created.
If the court has already extended the period to deliver the charge, this further extension will not apply. The person delivering the charge should comply with the deadline given by the court.
ANNUAL GENERAL MEETINGS (AGMs)
Schedule 14 of the Act introduces greater flexibility in holding AGMs and other meetings in a safe and practicable manner by relaxing some of the requirements which would make it difficult, if not impossible, to hold these sort of meetings in accordance with the Government’s social distancing legislation and guidelines.
Most notably it means that, for a temporary period beginning with 26 March 2020 and ending with 30 September 2020, companies and other bodies may postpone AGMs or convene meetings (and permit votes to be cast) by electronic means using a range of technologies such as ZOOM. If, for example, a company has a deadline to hold an AGM before the end of July, it can postpone that meeting to any later date before the end of September or it can arrange to hold a meeting electronically with a restricted number of participants communicating between different locations.
In the UK, a director can be held financially liable for wrongful trading if he knew, or ought reasonably to have known, that there was no reasonable prospect of the company avoiding insolvency and did not take every step to minimise the potential losses to the company’s creditors.
Section 12 of the Act temporarily removes the threat of personal liability arising from wrongful trading for directors who continue to trade a company between 1 March and 30 September 2020 with the uncertainty that the company may not be able to avoid insolvency in the future. While the wrongful trading rules are suspended, liquidators and administrators cannot make a claim against an insolvent company’s directors for any losses to the company or its creditors resulting from continued trading.
Notwithstanding this temporary suspension, directors need to be aware that they remain subject to fiduciary duties under the Companies Act 2006 and may still incur other forms of statutory liability such as liability for fraudulent trading.
STATUTORY DEMANDS AND WINDING-UP PETITIONS
The Act places temporary restrictions on the circumstances in which a creditor can bring a petition to wind up a company. Schedule 10 of the Act temporarily prohibits creditors from presenting a winding-up petition between 27 April 2020 and 30 September 2020 based on a statutory demand served between 1 March 2020 and 30 September 2020 for Covid-19 related debts. This should give companies temporary respite from aggressive debt collection methods where the company’s difficulties are short-term and caused by the Coronavirus pandemic.
Directors of insolvent companies, or companies that are likely to become insolvent, can obtain a 20-business day moratorium by applying to the court with the relevant documents listed in Section 1, Chapter 2 (A6) of the Act. The new moratorium will be overseen by an insolvency practitioner acting as a ‘monitor’, although the directors will remain in charge of running the business on a day-to-day basis subject to certain constraints.
The new moratorium is a standalone procedure designed to give struggling businesses breathing space to come up with a rescue plan. While the moratorium is in force, the company is protected from creditor enforcement action and is provided with a payment holiday in respect of certain liabilities that were incurred before the moratorium came into existence. However, during the moratorium the company must continue to pay on-going costs of running the business in addition to certain pre-moratorium debts which do not benefit from a payment holiday during the moratorium including financial creditors such as banks and other lenders.
NEW RESTRUCTURING PLAN
The existing Scheme of Arrangement procedure under the Companies Act, predominantly used to undertake the restructuring of companies with complex capital arrangements, has been a very successful financial restructuring tool. However, despite the success of the scheme, it does lack one key feature that limits its effectiveness and that is “cross-class cram down” (CCCD). Without CCCD, a single class of creditors can block a scheme from being agreed even when it is in the best interests of the company and the creditors.
The Act introduces a new restructuring plan procedure (RP) that closely resembles existing restructuring schemes but incorporates new CCCD provisions that allow a court to sanction the RP that is in the best interests of the company and its creditors, even where certain classes of creditors vote against it provided that the necessary conditions protecting creditors’ interests are met.
Unlike a scheme of arrangement, there is no requirement for a simple majority in number of creditors to approve the arrangement. In the new procedure, creditors will be formed into classes approved by the court and will vote on the proposed RP. At least 75% in value of the creditors within a class must vote in favour in order for the RP to be implemented.
Where a class does not vote in favour, the court will still be able to sanction the RP provided that the class(es) that voted against it are no worse off than they would have been under an alternative procedure. In addition, at least one class of creditors who would receive something in the next most likely outcome must vote in favour. The RP will, if approved by the court, enable companies to bind all creditors (including potentially both secured and other dissenting creditors) by “cramming down” their debts.
TERMINATION CLAUSES IN CONTRACTS
When a company enters an insolvency or restructuring procedure, suppliers of goods and services will often either stop or threaten to stop supplying the company. It is standard practice in the UK for supply contracts to include provisions whereby one party can terminate the contract if the other goes into some form of insolvency procedure thereby giving suppliers the right to stop or threaten to stop supply and, in turn, jeopardise attempts to rescue the business. Section 14 of the Act provides that these clauses will now cease to have effect (except for some exceptions) meaning that suppliers of goods and services will no longer be able to rely on contractual terms to stop supplying or to vary the contract terms once a customer company has gone into an insolvency procedure, including a moratorium or a restructuring plan.
Schedule 12 of the Act contains a list of exceptions to the type of supplier or contract which will fall within the remit of the termination provision. For example, contracts for the supply of goods or services to or from insurers, banks and recognised investment exchanges (amongst others) are excluded, as are financial contracts (including contracts for the provision of financial services), securities financing transactions and derivatives.