The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26 June 2020 and introduced emergency measures to provide protection to directors of companies which continue to trade notwithstanding the threat of insolvency, and to prevent, where possible, companies entering into insolvency due to COVID-19. Back in September, as a result of the continued COVID-19 pandemic crisis, the government decided to extend some, but not all, of these emergency measures. Now the government has decided to "re-activate" the other temporary measures.

Wrongful trading provisions in the Insolvency Act 1986 were originally suspended retrospectively between 1 March 2020 and 30 September 2020. During this time, if a director was otherwise found liable for wrongful trading, when considering the contribution a director is required to make to a company's debts, the court was entitled to assume the director was not responsible for worsening the financial position of the company. These provisions have now been re-activated to apply between 26 November 2020 and 30 April 2021 (but, unlike last time, with no retrospective effect). This is obviously an attempt to provide comfort to directors until there is an end in sight to the impact of the COVID-19 pandemic crisis on the financial fortunes of companies. It leaves directors (and the courts who need to interpret the provisions) in something of a minefield. In deciding whether a director should make a financial contribution to the assets of a company in financial difficulty, a court would need to consider only behaviour before 1 March 2020 and between 1 October 2020 and 25 November 2020 as potentially objectionable. Directors will need to review carefully the impact of this two-month hiatus "gap". That said, it is likely to be welcomed by the insolvency industry generally.

The Act introduces the following three new permanent financial rescue and restructuring strategies:

• a moratorium (or "breathing space") period for companies in financial difficulty (though still ultimately viable). During this time, there will be a stay on creditors' actions and certain debts will be subject to a payment holiday, allowing the company to engage with stakeholders and to prepare to restructure;
• a requirement for suppliers to continue to supply to companies in financial distress during the moratorium; and
• the creation of a "restructuring plan", with the ability to bind creditors to it. The expiry dates of the temporary emergency provisions relating to these new permanent procedures have been extended.

Wrongful trading: directors' liability

Section 214 of the Insolvency Act 1986 provides that a director can be held personally liable for company debts if the company continues to trade when the director knows (or ought to have known) that there was no reasonable prospect of the company avoiding entering insolvent liquidation/administration.

This temporary suspension is not a blanket defence to a breach of duty by directors, since the directors' general duties to act in the best interests of the company (or, on insolvency, its creditors) continue to apply and so directors still have to consider the impact of COVID-19 on a business, in particular in any decisions on whether to continue to trade.

Moratorium: eligibility criteria and assessment

Be it a standalone process (or as a gateway to a company voluntary arrangement (CVA), scheme or restructuring plan), the new moratorium is available to directors of an eligible company, which is either insolvent or prospectively insolvent.

The moratorium is started by lodging documents at court or, for overseas companies or those subject to an existing winding-up petition, on formal application to the court for the appointment of a monitor (who must be an insolvency practitioner).

A moratorium is not available for companies which have, in the previous 12 months, entered into a moratorium, administration or CVA, or are subject to a winding-up order.

The moratorium initially lasts 20 business days (30 for small businesses), subject to extension by the directors (up to 40 days), creditors (up to a year) or the court after that. It must also end if the company goes into administration or liquidation. It will continue while a CVA proposal is put in place and can continue during a scheme or restructuring plan with the court's permission. The monitor will bring it to an end earlier once the objective has been met or, importantly, if the monitor considers the objective can no longer be met.

Once in place, the moratorium gives the company a payment holiday for pre-moratorium debts that have fallen due either before or during the moratorium period, unless the debts fall within an exclusion.

Certain key payments are excluded from this payment holiday during the moratorium. Payments for goods or services, wages, the monitor's remuneration, redundancy payments, rent during the moratorium and, importantly, debts or other liabilities arising under "a contract or instrument for financial services" will still need to be paid, as well as those debts incurred during the moratorium, unless a CVA, scheme or restructuring plan is already under way.

In addition to the payment holiday, there is the usual stay on commencing insolvency proceedings, other legal proceedings, repossession and enforcement (like in an administration). This includes a stay on a landlord forfeiting a lease for non-payment and a stay on enforcement of most types of security. None of these can happen during the moratorium without the court's consent.

The company cannot obtain any credit over £500 (without disclosing the fact the moratorium is in place). It cannot grant security, dispose of property other than in the ordinary course of business or indeed pay any pre-moratorium debs over £5,000 (or 1% of the company's total unsecured liabilities, whichever is greater), without the consent of the monitor or the court. Hire-purchased property and property subject to a security interest may be disposed of during the moratorium, but only with the court's permission.

On 29 September 2020, the government extended certain temporary provisions relating to the moratorium until 30 March 2021:

• The temporary procedural rules on the operation of the moratorium (to bridge the gap until the general insolvency rules overhauled in 2016 can be amended).
• The waiver of the requirement that a UK company applying for a moratorium must use a court application if it is already subject to a winding-up petition.
• The prohibition on entities authorised to hold client money from obtaining a moratorium.
• The relaxation of the requirement that a company seeking a moratorium has not been in an insolvency procedure or previous moratorium in the last 12 months. 

Originally, the requirement that a company seeking a moratorium must prove it is "likely to be rescued as a going concern as a result" had been relaxed where the company's potential failure was due to the COVID-19 pandemic and this relaxation was also going to be extended until 30 March 2021. However, legislation coming into force on 1 October has now overturned the extension of the relaxation, so this will come to an end in a few days' time. Companies that are already subject to a moratorium before 1 October 2020, or that have made a court application for a moratorium before that date, will continue to be able to rely on the relaxation.

Protecting companies' supplies to help them continue trading during the moratorium

Again, this is largely a permanent change to insolvency law. However, certain exclusions to the provisions for small companies do have a limited timeframe.

When, and only when, a company goes into a number of formal insolvency processes (e.g. administration, liquidation CVA, the new moratorium but not schemes of arrangement), a supplier to that company is not entitled to cease supplying goods or services under its contract simply because of the insolvency or restructuring process.

Any term in a contract that allows a supplier of goods or services to terminate on a company's entry into an insolvency process will be invalid. It does not matter whether that provision operates automatically, or requires an election to be made or notice given by the other party. Nor can the supplier demand payment of outstanding pre-insolvency charges as a condition of continuing supply. If the supplier was already entitled to terminate the contract or supply before the company went into an insolvency process, the Act prevents the supplier exercising that right once the company is in the insolvency process. All this applies, unless the company or an insolvency officeholder agrees otherwise, or the court finds (on the supplier's application) that continuation of the contract would cause the supplier hardship.

Small suppliers have the benefit of a temporary exclusion most recently extended to apply until 30 March 2021. To qualify, the supplier must have at least two of the following:

• a turnover of no more than £10.2 million (or, on average, £850,000 per month if the supplier is in its first financial year);
• a balance sheet total of no more than £5.1 million; or
• no more than 50 employees.

Permanent exclusions include where either the insolvent company or supplier is an insurer, a bank or a series of other financial services institutions or payment systems providers, or where the contract is a "financial contract". A financial contract includes most loans, overdrafts, finance leases, factoring arrangements and a wide variety of guarantees, securities and commodities contracts, derivatives, securitisations, spots, futures or swaps, interbank borrowing or ISDA masters, capital market arrangements (and this term is the subject of debate within the industry), arrangements forming part of a PPP and, it seems, generally any potential financial markets set-off or netting arrangements (as defined by the Banking Act 2009). 

Creation of a "restructuring plan" binding creditors

The Act introduces a new permanent remedy into the 2006 Companies Act, giving companies that have "encountered or are likely to encounter financial difficulties that are affecting or will or may affect their ability to carry on business as a going concern" the ability to come to an arrangement or compromise with their creditors or members, or any class of them. It is available to any company liable to be wound up, which includes an overseas company with sufficient connection to the jurisdiction. It can be used by a company not already in a form of insolvency procedure or as part of that process.

However, only Companies Act companies can use the plan to effect a reconstruction or amalgamation involving a transfer of the company's undertaking or property. Currently, no companies are excluded from using the plan, but the Act gives the Secretary of State the power to exclude FCA-authorised entities.

To be sanctioned, a plan must have the purpose of eliminating, reducing, preventing or mitigating the effect of the financial difficulties the company is, will or may be encountering. It can include a reduction of share capital or a consolidation or division of share classes.

All creditors whose rights are affected must be allowed to participate in the meeting unless the court decides a particular class has no "genuine economic interest in the company".

If 75% in value of affected creditors or members vote in favour of the plan, the court then sanctions the plan.

If one class does not achieve the 75% threshold (a dissenting class), the court can still sanction the scheme and bind all creditors (including dissenting creditors) to it if the plan meets two conditions:

• that none of the dissenting class would be worse off under the plan than under the "relevant alternative". The relevant alternative is whatever the court considers (on evidence) would most likely occur to the company if the plan were not sanctioned; and
• that a class of creditors representing 75% in value who will receive payment under the plan, or who have a genuine economic interest in the relevant alternative, have voted in favour of the plan.

Where a plan is proposed within 12 weeks of any new style moratorium ending, no creditor with moratorium debt or excluded pre-moratorium debt may participate in meetings (though they will receive the statement) and the court will not sanction the plan if that creditor has not agreed to it.

Conclusions

Now the Act has been in force for six months, the benefits of the temporary provisions relating to wrongful trading have been re-assessed. Whilst the restructuring plan has been used successfully in a few high-profile restructurings, the moratorium has still not been used as much as it was first thought. Some companies have not been able to meet the criteria and, therefore, have continued to use the more traditional administration rescue procedure to help them out of financial difficulty. The most concerning aspect for creditors at this time is likely to be the ongoing issue of being "locked in" to supply contracts they are unable to terminate.

If you would like assistance in reviewing contractual provisions currently in place as a result of these changes, please contact a member of the team.