Corporate Insolvency and Government Act 2020

Statutory Demands

Statutory Demands sent to companies in the effective period (1st March 2020 to 30th September 2020, with the possibility of an extension) cannot be relied on at any time to form the basis of a Winding Up Petition against that company. This does not affect Statutory Demands sent to individuals. Statutory Demands are the simplest way to prove to the Court that a company cannot pay its debts and should be wound up.

Winding Up Petitions

Unless the Creditor can certify that they have reasonable grounds for believing that (a) Coronavirus has not had a financial impact on the company or (b) the fact by reference to which the relevant ground applies would have arisen even if Coronavirus had no financial effect on the company, Winding Up Petitions brought under Section 124 of the Insolvency Act 1986 (Petitions brought by a Creditor on the basis that the company is unable to pay its debts) will not be allowed to proceed. Any Winding Up Orders already made in the period 27th April 2020 onwards without that certification are void. If the Winding Up is not of a type dependent on inability to pay debts, the winding up petition may go ahead. This section had retrospective effect, so will catch some Petitions part way through their process. The Court is given power to deal with such cases “as the Court sees fit”.

Insolvency Act Wrongful Trading

The Insolvency Act 1986 contains an existing unlawful act of “wrongful trading”, basically trading in a way that disregards the interests of creditors when the company is insolvent. The new Act requires a court to disregard any acts of the director being complained about in a wrongful trading application by a liquidator if the act complained of took place in the period 1st March 2020 to 25th July 2020, with the possibility of this period being extended by The Secretary of State.

New Moratorium

From 25th June 2020 a company which finds itself in financial difficulties may be able to temporarily hold off its Creditors by making use of a new 20 business day moratorium. The moratorium is overseen by a “monitor,” who must be a licensed Insolvency Practitioner, and who must both be paid for by the company and provide a statement, as a condition of the moratorium being allowed, that it is likely that a moratorium for the company would result in the rescue of the company as a going concern. Additionally, the directors must provide a statement that, in their view, the company is, or is likely to become, unable to pay its debts.

The company continues to be run by its directors and management, in cooperation with the monitor. During the period of the moratorium most debts cannot be chased. The company still has an obligation to pay for any goods or services supplied during the moratorium period; wages, salaries, and rent arising during the moratorium and debts relating to financial services. Debts incurred before the moratorium are referred to as being subject to a “payment holiday.” Generally, creditors may not exercise rights to enforce security, to repossess premises or goods, to start or continue legal proceedings. The moratorium can be extended if certain debts are paid and the monitor agrees it is likely the moratorium continuing will result in the rescue of the company as a going concern. The maximum period without creditor consent is a further 20 business days.

During the period 25th June to 30th September 2020, both the monitor and the director’s certificates will be acceptable with the addition of “or would do so if it were not for any worsening of the financial position of the company for reasons relating to Coronavirus.”

Prohibition on Suppliers Terminating Contracts

From 25th June 2020, any contract clause, whether already in existence or made after this date, which says that a supplier may terminate a contract if the customer becomes insolvent, is unenforceable. The provisions also catch any clauses which substantially change the contract terms if the customer becomes insolvent, for in-stance, requiring security or changing payment terms. The prohibition applies to most contracts for the supply of goods or services.

There is a temporary exception for 1 month from 25th June 2020 where the supplier is a “small company.” A small company must meet two of three tests:

• Turnover not more than £10.2 million;
• Balance sheet not more than £5.1 million; and/or
• Not more than 50 employees.

The period for this temporary small suppliers’ exception can be extended by The Secretary of State.

Contact Us

If you require any further guidance, please don’t hesitate to get in touch with James Johnston, Head of our Dispute Resolution at jj@burnetts.co.uk or 01228 552222.

Burnetts' Commercial Litigation team is Top Tier - "Burnetts has a strong, diverse group of people who are clearly interested in the outcomes they achieve for their clients" - Legal 500, 2020.