Procurement in a Nutshell – Changes to insolvency legislation
29th May 2020
On the 20th May 2020, the Government laid the Corporate Insolvency and Governance Bill before Parliament.
It is likely to become law in late June / early July 2020 and contains both changes to the insolvency framework and temporary measures to support businesses during the Covid-19 pandemic. There are special provisions for PPP and PFI contracts.
Changes to the insolvency framework
The Bill introduces 3 significant changes all designed to help rescue viable businesses that are in financial difficulty:
A new “breathing space” moratorium for companies. This will give a qualifying company 20 business days’ breathing space from creditors (with the possibility of further extensions) to allow the business to look at its options and try to deal with its financial problems. During the moratorium, the directors remain in control of the business, a payment holiday is automatically put in place and creditors cannot take action to recover money. Note: there is a procedure that companies will need to follow before they can take advantage of this.
Restrictions on the ability of suppliers to terminate contracts on the grounds of customer insolvency and/or any breaches of contract that arose before the customer’s formal insolvency.
A brand new insolvency procedure to enable a company to restructure its debts. The new procedure will enable the rights of secured and unsecured creditors as well as shareholders to be compromised and will also for the first time enable cross cram down of claims.
Special provisions for public private partnership projects (“PPP”)
The new framework recognises the importance of PPPs (as defined in the bill):-
- PPP companies are not eligible for a moratorium.
- Debts arising under a PPP contract will not be eligible for a payment holiday under the new moratorium process – the insolvent company will need to continue to pay.
- In certain circumstances, the restrictions on terminating supplier contracts on insolvency will not apply.
Temporary Covid-19 measures
Wrongful trading rules relaxed – the wrongful trading rules make the directors of an insolvent business personally liable if the company trades past the point where the directors ought to have concluded that there is no reasonable prospect of avoiding a formal insolvency. The value of the claim can be as much as the loss incurred by the company after that point. Under the new rules, the Court is to assume that between 1st March and the 30th June (or 1 month after the bill becomes law, whichever is the later), the directors are not responsible for any worsening of the company’s financial position. This reduces the risk of personal liability for directors who continue to trade whilst the company is insolvent.
Temporary changes to the ability of creditors to wind up companies – between 27th April and 30th June 2020, creditors will be prevented from taking steps to wind up companies that owe them money unless (a) Covid-19 has not had “a financial effect” on the debtor or (b) the facts giving rise to the petition/order would have arisen even if Covid-19 had no financial effect on the debtor.
Companies will now be able to hold meetings electronically and some of the timings for meetings and Companies House filing requirements have been relaxed.
The Secretary of State will have new powers to make new temporary regulations in addition to the above to help reduce the number of insolvencies and/or mitigate the effects of Covid-19.
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