How has the law changed?
In part in response to the Covid-19 pandemic, legislation was passed by the government earlier this year which sought to assist companies to trade through the current economic climate. Included within the measures is a degree of protection from compulsory winding up.
The Corporate Insolvency and Governance Act 2020 (The Act), was laid before parliament on 20 May, and became law on 26 June. It is important creditors are aware of what changes have been implemented and the potential and impact which it may have upon debt recovery action you may be considering or have already commenced.
The main part of the Act affecting creditors is the temporary restriction on presentation of winding up petitions and the factors that the Court has to take into account when deciding whether to wind up a company.
On Thursday 24 September 2020 the government passed a further statutory instrument which extended the operation of these restrictions. As a result, the measures which were due to expire on Wednesday 30 September 2020 have now been extended until 31 December 2020.
A key point to note is that the Act has retrospective effect so any pending petitions presented after 27 April will be affected, along with any winding up orders made after that date.
The Act has introduced the following restrictions:
- A petition cannot be presented by a creditor during the period of 27 April 2020 and 31 December 2020 unless the creditor has reasonable grounds to believe that (a) coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor;
- A petition cannot be presented after 27 April 2020 if it is based on a unsatisfied statutory demand served between 1 March 2020 until 31 December 2020;
- When deciding whether to make a winding up order the Court will need to be satisfied that the grounds giving rise to the petition would have arisen even if Covid-19 did not have a financial effect on the debtor;
- All winding up orders made between the 27 April and 31 December will automatically be void (that is, of no legal effect) unless the Court would have made the winding up order if the new law was in force at the time the order was made.
Related FAQs
If changed circumstances mean that a business wants to exit from a contractual arrangement, then before trying to terminate it, a careful review should be carried out to see whether a right to terminate actually exists. For example:
- Not every contract for the sale of goods contains the right for the buyer to terminate in circumstances where the supplier hasn’t done anything wrong. If a business has entered into a contract on the supplier’s standard terms, it is unlikely to contain any such provision
- A contract for the provision of services is unlikely, if drafted by the customer, to contain a provision that allows the supplier to walk away from the arrangement at short notice, or perhaps at all
If a party tries to terminate a contract when it doesn’t have the right to do so, the other party will likely claim breach of contract and could sue for damages. In the case of a long term or high-value contract, this could amount to a very significant liability.
Even if the right to terminate the contract does exist, there might be particular rules about the following:
- How much notice has to be given
- How such notice has to be served (for example, it might have to be in writing to a particular address)
- When the notice can be served (perhaps on an anniversary of the start of the contract)
- How much a party has to pay if it cancels (for example, for raw materials, for work done to date, or even the whole contract price)
All of these factors must be taken into account, and any contractual processes for termination are followed.
You should already have a written furlough agreement with your furloughed employees, but if you move them to flexible furlough then you need a new agreement that confirms the new furlough arrangement.
So, you’ll need to speak to your employees and confirm the hours of work with them in writing (or reach a collective agreement with a recognised Trade Union.
As before, an employee does not need to provide a written response. But the agreement needs to be documented in writing.
The Regulations do not require any prior agreement between an employer and employee that it was not reasonably practicable for holiday to be taken for it to be carried over.
However, if an employee requests holiday then an employer must have ‘good reason’ for refusing it due to coronavirus. The term ‘good reason’ is not defined so the Government will expect employers, employees and (if necessary on any dispute) the Courts to apply common sense.
The Regulations are not confined to key workers so could, in principle, be used by employers for a wider range of employees.
The Government guidance suggests that the following factors should be taken into account when considering whether it was reasonably practicable to take the leave in the relevant year:
- Whether the business has faced a significant increase in demand due to COVID-19 that would reasonably require the worker to continue to be at work and cannot be met through alternative practical measures.
- The extent to which the business’ workforce is disrupted by COVID-19 and the practical options available to the business to provide temporary cover of essential activities.
- The health of the worker and how soon they need to take a period of rest and relaxation.
- The length of time remaining in the worker’s leave year.
- The extent to which the worker taking leave would impact on wider society’s response to, and recovery from, the effects of COVID-19.
- The ability of the remainder of the available workforce to provide cover for the worker going on leave.
In practice this means that any risk assessment will need to be reviewed constantly and adjusted as our understanding of the nature and level of the risk grows.
Some service-providers are instigating special Oversight Groups to keep this issue under review but engagement and consultation with those affected is critical and making sure they feel confident to raise concerns and refuse to work if they believe they are not safe.
Changing to shift working may give employers the opportunity to change hours / pay whilst also focusing work when it is needed. Like the other provisions, this should be done fairly, either across the board or by selecting teams/individuals based on objective business reasons. Imposing without agreement would create significant risk, therefore would require fair selection and consultation.