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BRIEFING PAPER

Number 8922, 1 June 2020

Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

By Lorraine Conway

Contents: 1. Current insolvency regime:

company rescue 2. Consultations and Covid-19

announcements 3. Overview of the Bill 4. The Bill: insolvency provisions 5. The Bill: corporate

governance provisions 6. Views of stakeholders 7. Business and insolvency

statistics

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Contents Summary 4

1. Current insolvency regime: company rescue 7 1.1 Company administration 7 1.2 Company voluntary arrangement (CVA) 9 1.3 Schemes of arrangement 10

2. Consultations and Covid-19 announcements 12 2.1 First consultation: Review of the Corporate Insolvency

Framework 12 2.2 Second consultation: Insolvency and Corporate Governance 13 2.3 Government’s response 13 2.4 Covid-19: Government announces temporary measures 14

3. Overview of the Bill 17 3.1 Context of the Bill 17 3.2 Structure of the Bill 17 3.3 Why is fast-track necessary? 18 3.4 Duration of clauses 18 3.5 New power to amend corporate insolvency or governance

legislation 19 3.6 Financial Services Sector 20

4. The Bill: insolvency provisions 22 4.1 Permanent insolvency measures 22

Introduction of a moratorium 23 New Part 26A restructuring plan 26 Ipso facto (termination) clauses in supply contracts 28

4.2 Temporary measures 31 Suspension of liability for wrongful trading 31

4.3 Voiding of statutory demands and restriction on winding up petitions (2 measures) 34

5. The Bill: corporate governance provisions 37 5.1 Holding of Annual General Meetings (AGMs) and other

meetings 37 Current law 37 What would the Bill do? 37

5.2 Filing Requirements 38 Current law 38 What would the Bill do? 39

6. Views of stakeholders 41 6.1 Permanent insolvency measures 41

Moratorium and new restructuring plan 41 Ipso facto clauses 42

6.2 The Bill’s temporary insolvency measures 42 Temporary suspension of wrongful trading 43 Corporate governance measures 44

7. Business and insolvency statistics 45 7.1 Impact of coronavirus on UK businesses 45 7.2 Insolvency statistics 47

Annex: territorial extent & application of the Bill 49

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Contributing Authors: Steve Browning, Corporate Governance, section 5. Lorna Booth and Georgina Hutton, Statistics, section 7.

Cover page image copyright Cover page image copyright: Pound coins / image cropped. Licensed under CC0 Creative Commons – no copyright required.

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Summary The Corporate Insolvency and Governance Bill [HC 2019-21] was introduced in the House of Commons on 20 May 2020, the Bill is expected to have its Second Reading on 3 June 2020. The Government intends to ask Parliament to expedite the parliamentary progress of the Bill. Justification for fast-tracking the entire Bill is based on the view that the measures are urgently needed to support businesses during the current Coronavirus crisis, to give viable companies the flexibility and breathing space they need to continue trading.

Due to the global outbreak of Covid-19, and national lockdown, many otherwise economically viable businesses are experiencing significant trading difficulties. Serious commercial consequences include a fall in consumer demand, delays in delivery of essential supplies, and cashflow issues. Some businesses (e.g. retail and hospitality) have been forced to stop trading altogether. Insolvency statistics, including the impact of coronavirus on UK businesses, are provided at section 7 of this paper.

The Government previously consulted on changes to the corporate insolvency regime and in August 2018 announced plans to introduce new insolvency restructuring measures. On 28 March 2020, the Business Secretary, Alok Sharma, announced that the Government would introduce these measures at the earliest opportunity together with temporary Covid-19 related measures intended to help companies avoid insolvency. On 23 April 2020, the Government announced other measures to protect companies from the aggressive use of statutory demands and winding petitions, particularly by commercial landlords.

The Bill’s overarching objective is to support businesses during the pandemic and maximise their chances of survival, protect jobs, and support the country’s economic recovery. The Bill consists of eight measures which conveniently fall into two sets: permanent changes to insolvency law and temporary changes to insolvency law and corporate governance.

The Bill’s permanent measures would add a new corporate restructuring package to insolvency law. This set of measures (previously announced by the Government, and in development before Covid-19) consists of the following:

• Introduction of a free-standing moratorium for UK companies.

There is currently no free-standing moratorium available to UK companies. The Bill would give struggling businesses a formal “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium no creditor action could be taken against the company without leave (i.e. permission) of the court. The moratorium would be overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company would remain with the directors (in effect, a “debtor in possession” process).

• Creation of a new Restructuring Plan. A new procedure to help viable companies struggling with debt obligations to restructure. It

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allows the court to sanction a restructuring plan that binds creditors if it is “fair and equitable” and in the interests of creditors. In other words, creditors vote on the plan, but the court can impose it on dissenting creditors (“cross-class cram down”).

• Widening of the “ipso facto” suspension provisions. When a company enters an insolvency or restructuring procedure, suppliers will often stop supplying the company. Ipso facto (or termination) clauses in the supply contract give them the right to do this. Under the Bill, suppliers would not be able to jeopardise a rescue in this way. The Bill includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the Covid-19 emergency.

The aim of the Bill’s temporary measures is to support businesses during the pandemic, help them to avoid insolvency and survive as a going concern. They would all have retrospective effect. This set of measures consists of the following:

• Temporary suspension of wrongful trading. The Bill would temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the Covid-19 crisis, with the uncertainty that the company may not be able to avoid insolvency in the future. However, all the other checks and balances on directors would remain in place. The measure would apply retrospectively from 1 March 2020.

• Temporary suspension of statutory demand provisions and a restriction on winding-up petitions (2 measures). The Bill would temporarily remove the threat of winding-up proceedings where the unpaid debt is due to Covid-19. The restriction period would apply retrospectively from 27 April 2020. It would also introduce temporary provisions to void statutory demands issued against companies during the emergency (from 1 March 2020). The aim is to give businesses the opportunity to reach realistic and fair agreements with all creditors.

• Flexibility on holding Annual General Meetings (AGMs) and other meetings. The Bill would temporarily allow companies (and other bodies) to overcome requirements in legislation or their constitution or rules which prevent the AGM and other meetings to be held in a way that is consistent with the need to limit the spread of Covid-19 and the social distancing restrictions which have been put in place by legislation and guidance. This measure would apply retrospectively from 26 March 2020. Additionally, the Bill would allow companies and other bodies to postpone their AGMs. Directors would not be exposed to liability for failing to hold an AGM in accordance with a company’s constitution or acting without shareholder endorsement.

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• Extending filing deadlines. The Bill provides for a temporary extension to the period allowed for the directors of a public company to comply with their obligation under section 441 of the Companies Act 2006 to deliver accounts and reports for a financial year to the Registrar at Companies House. The measure would apply retrospectively from 26 March 2020. In addition, the Bill would empower the Secretary of State to make regulations to extend the deadline for certain other filings at Companies House. This power would expire on 5 April 2021.

These are all time limited measures introduced to support UK companies during the Covid-19 crisis. Specifically, the suspension of wrongful trading liability, and statutory demands and winding-up petitions measures would expire on 30 June 2020 or one month after the coming into force of this Bill, whichever is the later. The AGM measure and the company accounts filing measure would both expire on 30 September 2020. However, some of these dates are extendable.

The Corporate Insolvency and Governance Bill is a large Bill and its insolvency provisions are technical and complex. This House of Commons briefing paper provides an overview of the Bill and information on how its provisions would affect existing legislation in this area. Information on the technical detail is available in the Explanatory Notes which accompanies the Bill.

The territorial extent of the Bill is, variously, the whole of the UK; England and Wales and Scotland; England and Wales only; Scotland only; or Northern Ireland only. A table in the Explanatory Notes summarises the position and is reproduced in the annex to this paper. An economic assessment and regulatory impact of the Bill’s temporary measures can be found in Annex B of the Explanatory Notes. An impact assessment on the permanent insolvency framework measures has been published alongside the Bill.

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1. Current insolvency regime: company rescue

Taken together, the new permanent insolvency measures contained in the Bill would add a new corporate restructuring package to insolvency law, including a freestanding moratorium and a new restructuring plan that would sit alongside existing company voluntary arrangements (CVAs) and schemes of arrangement. To help understand these new measures and to put them into some legal context, this section of the paper summarises the current company rescue regime.

There are several existing procedures to help rescue a financially distressed company. In addition to administration, a legal procedure under Part II of the Insolvency Act 1986 (IA 1986), there are two statutory mechanisms a company can use to reach an agreement with its creditors, a CVA under Part 1 of IA 1986 and schemes of arrangement under Part 26 of the Companies Act 2006 (CA 2006). According to BEIS,1 while administration can in certain circumstances be effective in restructuring a company (an administrator is appointed to manage the company’s affairs), debtor-in-possession models (where the directors remain in control of the company), such as a CVA and scheme of arrangement, are more likely to result in company rescue.2

1.1 Company administration At its heart, administration is a company rescue tool. A legal procedure under the IA 1986,3 a company may be put into administration by court order or by an out-of-court procedure available to the company itself, its directors, or a qualifying floating charge holder.4 The company is taken over by an administrator (an insolvency practitioner) whose primary aim, if possible, is to restructure and rescue the company as a going concern. A statutory moratorium5 protects a company from legal actions whilst a survival plan or an orderly wind down of the company’s affairs is being achieved. By the end of the administration the company may survive, but often the business and company’s assets are sold, and the administration ends in a liquidation.

1 Explanatory Notes p.12 2 The current legislation relating to corporate insolvency in Northern Ireland is to be

found in the Insolvency (Northern Ireland) Order 1989, which makes equivalent provision to the Insolvency Act 1986 (except for section 233A)

3 Detailed information about the administration procedure is available in a separate Library briefing paper, “Insolvency: company administration” (CBP 4915)

4 A floating charge is taken over substantially the whole of the company’s property as security for borrowings (debentures) or other indebtedness. Whilst solvent, charged assets can be bought and sold during the course of the company’s business without reference to the charge holder. The floating charge is said to “crystallise” if there is a default. At that stage, the floating charge is converted to a fixed charge. A “qualifying floating charge holder” is any creditor (but usually a bank) holding a floating charge which explicitly allows the creditor to appoint an administrator.

5 A statutory moratorium applies in administration which protects the company against creditor action (including the commencement of legal proceedings) except with the consent of the administrator or court

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Following the Covid-19 outbreak, the insolvency profession have been adapting existing insolvency tools to “steer viable companies through the crisis”.6 Some insolvency practitioners have been using ‘light touch’ administration as a company recue tool.7 This is where the appointed administrators leave certain management powers, and essentially the day-to-day running of the business with directors, while they focus on developing a rescue plan to preserve the long-term viability of the company.8 Light touch administration has been used by some in conjunction with a draft “Consent Protocol”9 setting out key powers that may be retained by directors; the conditions on which the powers are exercisable by the directors; certain restrictions to the directors’ powers; and the administrators right to vary or terminate the consent at any time.10

For many companies facing accumulated debt because of the lockdown imposed to stop the spread of Covid-19, administration may be an effective rescue tool as it provides both the protection of a moratorium from creditor action and a flexible framework in which to implement a rescue strategy. The procedure is highly flexible, “it allows for manoeuvre and revision of the administrators’ initial proposals to take account of changing circumstances.”11 However, it may be difficult for administrators to identify whether a company can meet the primary statutory objective of being rescued as a going concern.12

Snowden J’s judgment in the recent High court case of Re Carluccio’s Ltd (In administration)13 appears to underline the importance of administration in helping businesses survive the Covid-19 crisis. In this case, the court recognised that both the Government’s Furlough Scheme and insolvency legislation share a common aim in promoting a rescue culture for the continuation of businesses and the preservation of employment wherever possible. The IA 1986 should therefore be interpreted as permitting administrators to give effect to the Scheme and to give super-priority to furlough payments.14

6 “Light Touch Rescue”, Chloe Shuffrey, 3 Hare Court, New Law Journal/2020 170 NLJ

7886, p.15, 15 May 2020, [online] (accessed 26 May 2020) 7 Ibid 8 Ibid 9 This draft “Consent Protocol”, being circulated by the Insolvency Lawyers Association

and City of London Law Society, was drafted by members of South Square, pursuant to para 64 of Schedule B1 Insolvency Act 1986. (See “Light Touch Rescue”, Chloe Shuffrey, 3 Hare Court, New Law Journal/2020 170 NLJ 7886, p.15, 15 May 2020).

10 It should be noted that the “Consent Protocol” is prefaced by a declaration by the administrators that they only provide their consent for directors to exercise the powers on the basis that they have certified that the administration is reasonably likely to achieve the rescue of the company as a going concern and are reasonably satisfied that the company has sufficient funding to pay post-administration costs (e.g. employee salaries, rent, utilities and suppliers on an on-going basis).

11 Ibid 12 Paragraph 54 of Schedule B1 Insolvency Act 1986 (see “Light Touch Rescue”, Chloe

Shuffrey, 3 Hare Court, New Law Journal/2020 170 NLJ 7886, p.15, 15 May 2020) 13 Re Carluccio’s Ltd (in administration) and in the matter of the Insolvency Act [2020]

EWHC 886 (Ch), (12 April 2020) 14 In this case, the court held that an employment contract may be adopted by the

administrators in such a way that only requires payment of wages at a level equal to the grant received under the Government’s Job Retention Scheme in respect of the employee

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1.2 Company voluntary arrangement (CVA) In brief, a CVA is a procedure under Part 1 of the IA 1986 that allows a company to come to some other arrangement with its creditors over the payment of its debts. Often, a company will settle its debts by paying only a proportion of the amount that it owes to creditors.

At present CVAs are used by companies seeking to restructure, but they cannot affect the rights of secured creditors or preferential creditors without their consent. Importantly, where a CVA proposal is made in respect of a “small company”, the company can obtain a temporary, optional moratorium (i.e. stay on creditor action).15

A CVA comes into force at the time when the company creditors approve a CVA proposal (or any modification of it). Approval requires a positive vote by at least 75% (by value) of the creditors who vote on it.16 Once approved, the CVA binds all the unsecured creditors of a company who were entitled to vote on the proposal. The CVA is then implemented under the supervision of an insolvency practitioner (the “supervisor”).

In appropriate circumstances, a CVA can be a useful company rescue procedure. Creditors usually agree a CVA based on realistic forecasts of the company’s future profitability and asset valuation. At present, it is difficult to provide this information since it is largely dependent on how long the current Covid-19 restrictions remain in place and the rate of economic recovery.17

R3 (the Association of Business Recovery Professionals) states that even in normal times, it can be difficult to rescue a company. Once in financial distress, it can be difficult for a small company to placate its creditors and suppliers (whilst competitors are circling) in order to frame some sort of restructuring agreement. Some large companies and groups also struggle to achieve an out-of-court restructure or rescue agreement. Their high leverage leaves them more at risk if they suffer any reduction in operating cash flow as they must continue to pay high debt service costs.18 Large companies and groups are also subject to highly liquid secondary market for debt in which new investors trade into the situation and there are many different types of loan investor.19 Consequently, large companies in the UK have increasingly come to rely on schemes of arrangement in order to implement their restructuring proposals.

15 This moratorium is similar in scope to the moratorium that applies to a company in

administration 16 There is a further condition that no more than 50% (by value) of any creditors who

vote against the proposal (or a modification of it) are creditors who are unconnected with the company

17 “Light Touch Rescue”, Chloe Shuffrey, 3 Hare Court, New Law Journal/2020 170 NLJ 7886, p.15, 15 May 2020, [online] (accessed 20 May 2020)

18 “Wrangling reform into the insolvency toolbox”, Sarah Paterson & Mike Pink, R3 Recovery publication, summer 2019

19 Ibid

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1.3 Schemes of arrangement A scheme of arrangement is a compromise or arrangement between a company and its members or creditors (or any class of them) under Part 26 of the CA 2006 . It can be used to bring about a solvent reorganisation of a company or group structure (including by merger or demerger) as well as to effect insolvent restructurings by a wide variety of debt reduction strategies (such as a “debt for equity swap”). The main advantage of this statutory procedure is its flexibility - it contains almost no restrictions on the nature of the arrangement that can be reached between the parties - but it also provides for court oversight and creditor protections.

According to R3 and other insolvency commentators, the scheme of arrangement procedure has proved both adaptable and effective in supporting the restructuring of large, highly leveraged companies. As well as domestic companies, overseas companies can use a scheme of arrangement in the UK to effect restructurings provided they can show a “sufficient connection” to the jurisdiction.

However, schemes of arrangement are also criticised for largely involving the investment banking sector and “restructuring boutiques”, effectively leaving the insolvency practitioner “on the side lines”.20 Furthermore, the procedure lacks two important features associated with company rescue:

(i) a moratorium to keep company assets together while the restructuring is negotiated; and

(ii) the power to impose a restructuring plan on an entire class of dissenting creditors or shareholders, known as a “cross class cram-down” power.

Currently, creditors (and sometimes members) voting on a scheme of arrangement are divided into classes for voting purposes according to their rights going into the scheme and the rights which they will acquire under it. Each class must vote on the proposed scheme. If all classes vote in favour of the scheme (requiring a 75% by value and a majority by number of each class), the court must then decide whether to sanction it. If an entire class votes down the scheme there is no court power to approve it over the wishes of that class.21 However, not all creditors or members of a company need to be included in a scheme; a company may organise a scheme in such a way as to exclude some creditors or members from it. Those creditors or members who are not bound by the scheme retain their existing rights.

By way of comparison, both a moratorium (i.e. an automatic stay) and a cross-class cram-down power are features of US Chapter 11

20 Ibid 21 A “workaround” has been developed whereby the scheme of arrangement is coupled

with a pre-packaged administration sale. In situations where there are out-of-the-money shareholders, the company can first be put into administration, allowing the administrator to commence a “pre-pack” and subsequently implement the restructuring without the dissenting class blocking the proposed arrangements.

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proceedings.22 Cross-class cram-down is also a key part of the new EU Preventive Restructuring Framework Directive 2019/1023.23

22 Chapter 11 refers to the chapter of the US Bankruptcy Code that sets out the statutory

procedure for reorganisation proceedings under US bankruptcy law. (US bankruptcy law is a federal law that applies across all US states).

23 Under Directive 2019/1023, enterprises in each member state should have access to a preventive restructuring framework which enables them to avoid insolvency and to continue operating. In the past, EU insolvency legislation has focused on regulating cross-border insolvency proceedings and related issues (e.g. the jurisdiction of the courts, the recognition of the effects of proceedings in other member states, and conflicts of laws). This Directive is the first step in the process of harmonising the EU’s diverse insolvency laws.

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2. Consultations and Covid-19 announcements

The Department for Business, Energy & Industrial Strategy (BEIS) previously consulted in 2016 and again in 2018 on new proposals aimed at improving the UK’s corporate governance and insolvency framework. The overriding aim being to ensure the highest standards of behaviour in those who lead and control companies in, or approaching, insolvency.

2.1 First consultation: Review of the Corporate Insolvency Framework

In May 2016, the Insolvency Service launched its consultation, “A Review of the Corporate Insolvency Framework”.24 It consulted on a package of insolvency reforms all intended to help businesses to continue trading through the restructuring process. Proposals included creating a company moratorium; developing a flexible restructuring plan; and helping businesses to continue trading through the restructuring process. The consultation closed on 6 July 2016 and the Government published a summary of responses on 28 September 2016.25 According to this summary, a range of views were expressed on the technical detail but there was broad support for the principles behind the proposals. The Insolvency Service made a commitment to continue to liaise with stakeholders to refine its proposals.

With Carillion plc entering compulsory liquidation on 15 January 2018, questions were asked about the ability of the Insolvency regime to deal with large corporate failures. On 9 February 2018, Stephen McPartland MP, Chair of the Regulatory Reform Committee, called on the Government to bring forward proposals to reform the insolvency framework. He raised the issue with David Lidington, then a Cabinet Office Minister, during a meeting of the Liaison Committee to examine the cross-Government response to the collapse of Carillion. Specifically, he asked whether the Insolvency Service had all the resources it needed and whether opportunities had been missed to support the orderly winding-up of Carillion via administration rather than liquidation.

Following this meeting, Mr McPartland said:

“[…] many of the basic insolvency procedures have remained largely unchanged since 2004 and there is a risk that this is making it harder for UK-based companies to avoid insolvency. The Government needs to respond to the consultation it held 18 months ago and come forward with some proposals to reform the

24 The Insolvency Service, “A Review of the Corporate Insolvency Framework – A

consultation on options for reform”, May 2016, [online] (accessed 26 May 2020) 25 The Insolvency Service, “Summary of Responses: Review of the Corporate Insolvency

Framework – A consultation on options for reform”, May 2016, [online] (accessed 26 May 2020)

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insolvency framework to ensure the UK remains an attractive place for corporate restructuring”.26

2.2 Second consultation: Insolvency and Corporate Governance

On 20 March 2018, BEIS published a second consultation document, Insolvency and Corporate Governance.27 In the wake of major company failures, views were sought on proposals to reduce the risk of major company failures through shortcomings of governance or stewardship, to strengthen the responsibilities of directors of firms when they are in or approaching insolvency, and to ensure a fair balance of interests for all stakeholders. The consultation sought views on the sale of businesses in distress, reversal of value extraction schemes, the investigation of the actions of directors of dissolved companies; protection of company supply chains in the event of insolvency; and strengthening pre-insolvency corporate governance. This consultation ended on 11 June 2018.

2.3 Government’s response On 26 August 2018, the Government published its response28 to both the 2016 and 2018 consultations. In this response, it announced plans to introduce new restructuring procedures designed to help businesses to continue trading through the rescue process. Specifically, it would take forward it’s proposals for:

• a new pre-insolvency moratorium, giving companies undergoing a restructuring plan a time limited moratorium or breathing space from creditor action;

• a new restructuring plan modelled on the current scheme of arrangement procedure but offering a cross-class cram-down power; and

• prohibit the use of ipso facto (termination) clauses in contracts for the supply of goods and services when a company enters an insolvency or restructuring procedure (in a further nod to US Chapter 11 proceedings).29

Commenting on these measures the Government said that they would strike a fair balance between the rights of the company seeking rescue and the rights of creditors seeking payment of debts.30

26 Liaison Committee Oral Evidence: Cross-Government Response to Collapse of

Carillion, HC 770, 7 February 2018 [online] (accessed 22 November 2019) 27 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate

Governance, 20 March 2018, [online] (accessed 26 May 2020) 28 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate

Governance – Government Response, 26 August 2018, [online] (accessed 26 May 2020)

29 Ipso facto clause is a provision in an agreement which permits its termination due to the insolvency or financial condition of a party

30 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate Governance – Government Response, 26 August 2018, [online] (accessed 26 May 2020)

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These new measures are now contained in the Corporate Insolvency and Governance Bill. Based on the announcement of the Business Secretary, Alok Sharma, on 28 March 2020 (see below), the Government intends to fast track the implementation of these permanent changes to insolvency law, as well as introduce temporary measures to help viable companies to survive the crisis created by COVID -19.

Further detailed information on both the 2016 and 2018 consultations is provided in a separate Library briefing paper, Corporate insolvency framework: proposed major reforms (CBP 8291).

2.4 Covid-19: Government announces temporary measures

On 28 March 2020, the Business Secretary, Alok Sharma, announced that temporary insolvency and corporate governance measures would be introduced in Parliament at the earliest opportunity to help businesses in financial difficulty due to Covid-19. Significantly, wrongful trading rules would be suspended for three months in order to remove the threat of directors incurring personal liability whilst trading on through the pandemic. This change in law is to be applied retrospectively from 1 March 2020 for an initial period of three months.

Other measures included legislation to ensure those companies required by law to hold Annual General Meetings (AGMs) would be able to do so safely, consistent with the restrictions on movement and gatherings introduced to address the spread of coronavirus.31 This temporary measure is to apply retrospectively from 26 March 2020. This followed an earlier announcement that companies would automatically and immediately be granted a three-month extension to the filing of their accounts following a fast-track online process;32 over 50, 0000 businesses have already taken advantage of this concession.33

According to BEIS, the aim of these measures is to give directors greater confidence to keep their businesses trading during the Covid-19 crisis, and paying their staff and suppliers, even if there are insolvency fears, without the threat of incurring personal liability.34

It should also be noted that a moratorium on enforcement of forfeiture of leases for non-payment of commercial rent provided in the Coronavirus Act 2020 came into effect on 25 March 2020.35 This means

31 Department for Business, Energy & Industrial Strategy, HM Revenue & Custom, The

Insolvency Service, Health and Safety Executive, Office for Product Safety and Standards, and the Rt Hon Alok Sharma MP, Press Release, “Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19”, 28 March 2020, [online] (accessed 26 May 2020)

32 Ibid 33 Financial Conduct Authority, “Financial services exemptions in forthcoming

Corporate Insolvency and Governance Bill”, 14 May 2020 [online] (accessed 26 May 2020)

34 Ibid 35 Section 82, Coronavirus Act 2020 (England and Wales) and section 83 (Northern

Ireland. Provision for Scotland is made by paragraph 7 of Schedule 7 of the Coronavirus (Scotland) Act 2020

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no business tenant can be forced from their premises in the period up to 30 June 2020 if they miss a payment, although this period can be extended. In effect, the Coronavirus Act 2020 offers a “breathing space” for commercial tenants. It does not, however, stop rent and other sums due under the lease from accruing or waive the tenant’s liability to pay.

On 23 April 2020, the Government announced36 new temporary measures to protect commercial tenants from aggressive rent collection tactics and the use of statutory demands and winding petitions during the pandemic.37 In particular, it wanted to safeguard the UK high street. These measures included a temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to Covid-19, to prevent a wave of insolvencies. A further government announcement38 on 25 April 2020 provided a basic timeline for the new measures:

• statutory demands made between 1 March 2020 and 30 June 2020 will not be able to form the basis of a petition and

• winding-up petitions presented between 27 April 2020 and 30 June 2020 will be voided

where a “company cannot pay its bills due to Covid-19.

The intention is that winding-up petitions claiming that a company is unable to pay its debts must be reviewed by the court to determine why. Petitions will not be permitted to be presented where the inability to pay debts is the result of Covid-19. Commenting on why intervention is needed, the Government said:

In this exceptional time for the UK, it is vital that we ensure businesses are kept afloat so that they can continue to provide the jobs our economy needs beyond the coronavirus pandemic.39

By way of comparison, the German and Australian governments have already introduced laws to make it harder for creditors to companies to file winding-up petitions during the coronavirus crisis.

All these temporary measures are included in the Corporate Insolvency and Governance Bill, along with the permanent changes to insolvency law announced on 28 March 2020. Speaking at a Downing Street press conference, Alok Sharma said the Government hoped the proposed

36 Ministry of Housing, Communities and Local Government & Department for Business,

Energy and Industrial Strategy, “New measures to protect UK high street from aggressive rent collection and closure”, GOV.UK, 23 April 2020 subsequently updated 25 April 20320, [online] (accessed 26 May 2020)

37 Commercial Rent Arrears Recovery (or CRAR) replaced the common law remedy of distress for rent arrears recovery in 2014. The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 have been made to provide commercial tenant with more breathing space to pay rent by preventing landlords using CRAR unless an amount equal to 90 days rent is overdue. This restriction will apply where the notice of enforcement is given after 25 April 2020 and before 30 June 2020 (this date can be extended).

38 Ministry of Housing, Communities and Local Government & Department for Business, Energy and Industrial Strategy, “New measures to protect UK high street from aggressive rent collection and closure”, GOV.UK, 23 April 2020 subsequently updated 25 April 20320, [online] (accessed 26 May 2020)

39 Ibid

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measures would give firms “greater flexibility” and the extra time and space they need to “weather the storm” and “emerge intact the other side” of the pandemic.40 He explained the Government’s position as follows:

The Government is doing everything in its power to save lives and protect livelihoods during these unprecedented times.

[…]

Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.41

The insolvency and corporate governance measures contained in the Bill should be seen in the context of other business support that the Chancellor, Rishi Sunak, has already introduced, including the Job Retention Scheme; allowing companies to defer VAT payments; and stop paying taxes on property leases. As already mentioned, there has also been a moratorium on commercial property evictions for businesses that miss rent payments.

40 Department for Business, Energy & Industrial Strategy, HM Revenue & Custom, The

Insolvency Service, Health and Safety Executive, Office for Product Safety and Standards, and the Rt Hon Alok Sharma MP, Press Release, “Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19”, 28 March 2020, [online] (accessed 26 May 2020)

41 Ibid

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3. Overview of the Bill

3.1 Context of the Bill The backdrop to the Bill is the Covid-19 outbreak, the consequential trading difficulties, and the risk of a wave of insolvencies. According to BEIS, “whilst companies have asked the Government for financial support, they have also asked the Government to make change to regulations to support them”. As outlined in the previous section, the changes to insolvency and company law contained in the Bill are intended to build on action BEIS have already taken to support businesses.

As summarised in the Explanatory Notes, the Bill has three main purposes:

1. To temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action.

2. Amend company law to provide businesses with temporary easements on company filing and annual general meetings (which will extend to mutual societies) thus allowing them to focus their resources on continuing to trade in this uncertain time.

3. To introduce new corporate restructuring tools to the insolvency regime to give companies the breathing space and tools required to maximise their chance of survival and strengthen the UK’s insolvency framework to bring it up to international best practice.

3.2 Structure of the Bill This is a large, multi-part Bill, consisting of 47 clauses and 14 schedules. It is highly technical in nature, touching on insolvency and company law.

The Bill contains six insolvency measures to support businesses. Some of these measures would bring about permanent changes to insolvency law (i.e. a company moratorium, a new restructuring plan, and widening the “ipso facto” provisions) other measures are both temporary and retrospective (i.e. suspension of wrongful trading and statutory demands and winding-up petitions measures). All insolvency measures are considered in detail in section 4 of this briefing paper). The Bill would also introduce temporary corporate governance measures (the holding of AGMs and filling of company documents). These measures are considered separately, in section 5.

An added complexity is the territorial extent and application of the Bill – there are various permutations. The provisions of this Bill would apply either to the whole of the UK; to England and Wales and Scotland; to England and Wales only; to Scotland only; or to Northern Ireland only. Clause 45 in the Bill sets out the territorial extent of the Bill. A table in Annex A of the Explanatory Notes provides a summary of the position. This table is also reproduced in the annex to this paper.

18 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

3.3 Why is fast-track necessary? The Government intends to ask Parliament to expedite the parliamentary progress of the Bill. The expectation is that all of stages in the House of Commons will take place on 3 June 2020, the Bill will then pass to the House of Lords. The Government justifies fast-tracking the entire Bill on the basis that the measures are needed urgently to support business and help struggling but viable companies to avoid insolvency.42 It said:

The Government has carefully considered the implications of using the fast-track process for the passage of the Bill. Due to the Covid-19 pandemic, many UK companies face the threat of insolvency owing to significant trading difficulties brought on by this crisis. Consequently, the measures in this Bill need to be brought in as soon as possible to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time.43

For the measures to be as effective as possible in supporting companies, the Government has said Royal Assent needs to be secured as soon as possible. As the extract below indicates, the Government has discussed the policy proposals of the Bill with Opposition parties:

Discussions have been held with Opposition parties to inform them of the content of the Bill and a draft of the Bill was sent to, amongst others, the Shadow Secretary of State for Business, Energy and Industrial Strategy, and the Convenor of the Crossbench Peers in the Lords.44

3.4 Duration of clauses The company law measures, suspension of wrongful trading liability, and statutory demands and winding-up petitions measures contained in the Bill are all time limited measures introduced to support UK companies during the Covid-19 crisis. The time-limits are as follows:

• The suspension of wrongful trading liability, and statutory demands and winding-up petitions measures would expire on 30 June 2020 or one month after the coming into force of this Bill, whichever is the later.

• The AGM measure would expire on 30 September 2020 and the filing requirements measures would expire on 5 April 2021.

Some of these dates are extendable. Indeed, it would be possible to extend some provisions of the Bill while letting others expire if they were deemed no longer necessary. As outlined below, the Bill contains a power to amend corporate insolvency or governance legislation. This means that additional time limited measures could be introduced to support businesses during the Covid-19 crisis.

42 In their report on Fast-track legislation: Constitutional Implications and Safeguards,

the House of Lords Select Committee on the Constitution recommended that the Government should provide information as to why a piece of legislation should be fast-tracked (see House of Lords Committee, 15th report of session 2008/09, HL paper 116-I, para.186)

43 Explanatory Notes, p.16 44 Explanatory Notes, p.17

19 Commons Library Briefing, 1 June 2020

3.5 New power to amend corporate insolvency or governance legislation

The Bill (clauses 18-22) contains a power to amend corporate insolvency or governance legislation. This power would allow the Secretary of State to temporarily amend corporate insolvency and related legislation through regulations made by statutory instrument (SI). Amendments made under the power contained within this provision may be made to both primary and secondary legislation (falling within the definition of “corporate insolvency or governance legislation”). However, there are certain conditions for using this power (clause 19), in that it may only be used to:

• reduce or assist in reducing the number of companies entering insolvency processes or restructuring procedures,

• mitigate the impact of an increased number of cases entering these procedures, or

• mitigate the effect of the insolvency regime on the responsibilities of directors of those companies whose businesses are struggling due to the impact of the pandemic.

It is important to note that this power is time limited (clause 22). The Secretary of State may not use the power after 30 April 2021. This date may be changed (i.e. if the impact of the pandemic is still being felt by business) but may not be extended beyond a year. Such an extension of up to a year may however be made more than once.45

The Government justifies creating this power on the basis that it is needed to help it to react quickly to the impact of the pandemic on businesses:

Providing for temporary legislative change in this way will mean that the insolvency and business rescue regime may quickly react and adapt to deal with significant and potentially unexpected future challenges presented by the impact of the Covid-19 pandemic on business.

Temporary amendments to legislation may be framed to give protection to companies which would be viable but for the effect of the pandemic, and to provide the regulatory support needed for their survival rather than being forced to enter insolvency proceedings. Changes may also allow for a temporary increase in flexibility in provisions within corporate insolvency and restructuring processes. This could be to mitigate the increased difficulty in adhering to those processes, such as meeting time limits, which may be caused by the impact of the pandemic. The provision could also be used to make temporary amendments to the insolvency related enforcement regime, to ensure that it remains fair and workable in the face of the impact of the pandemic on business.46

According to BEIS, there are currently no specific plans to use the power contained within this provision, but as the full extent of the impact of

45 Such an extension would be through a statutory instrument subject to the normal

affirmative procedure 46 Explanatory Notes, p.9

20 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

the pandemic on business becomes clear, it could be exercised to make urgent preventative or mitigative amendments.47

This new power is wide-ranging. However, any changes made by this power must be kept under review by the Secretary of State and revoked if no longer needed or revised to take account of changing circumstances. There are also the following significant restrictions on the use of this power:

• The impact of any proposed amendments on any person (such as a creditor or employee) likely to be affected by them must first be considered.

• The temporary amendments made must be proportionate to the challenges presented.

• The effect of the amendment could not practicably be achieved without legislative change.

• The provision may not be used where the proposed amendment could be made using existing provisions whilst still achieving the objective of legislating significantly quickly.

In addition, amendments made under this provision may not create a criminal offence or a civil penalty, though they may modify the circumstances under which a person is guilty of an existing offence or civil sanction. The provision may not be used to create or increase a fee.

A statutory instrument containing regulations to temporarily amend corporate insolvency or governance legislation under this provision would be subject to a “made affirmative” process, which means that the changes will be effective immediately upon the statutory instrument being made. According to BEIS, the use of this process is again justified by the need to react quickly to support businesses:

This [“made affirmative” process] is necessary because the need for temporary amendments is in most cases likely to be pressing, and the time delay in seeking approval by both Houses of Parliament in the normal way could have a detrimental effect. The SI is however required to be laid as soon as possible after being made, and will require approval by both Houses within 40 sitting days, or the change will cease.48

It is important to note that temporary changes made in this way may last for a maximum of 6 months but could be extended using a similar “made affirmative” process. However, the temporary changes could also be curtailed through a statutory instrument subject to a negative resolution process, and they must be revoked or amended, if it is clear that the impact of the pandemic has eased sufficiently.

3.6 Financial Services Sector The following measures contained in the Bill will not be available for some financial services firms and contracts:

• Company moratorium

47 Ibid 48 Explanatory Notes p.10 (para.44)

21 Commons Library Briefing, 1 June 2020

• Suspension of ipso facto (termination) clauses

• Temporary suspension of wrongful trading provisions from 1 March 2020 for 3 months.

The list of exclusions from the measures is expected to include banks, investment firms, insurers, payments and e-money institutions and certain market infrastructure bodies. Firms that safeguard client assets are also expected to be excluded from the company moratorium during the coronavirus period and temporary suspension of wrongful trading provisions. According to the FCA, these exclusions are necessary in order to protect consumers and financial stability.49

However, the new restructuring plan provided for in the Bill is expected to be available to financial services firms, through the appropriate safeguards including a role for the FCA (Financial Conduct Authority)50 and PRA (Prudential Regulation Authority).51

49 Financial Conduct Authority Statement, “Financial Services Exemptions in

Forthcoming Corporate Insolvency and Governance Bill”, 14 May 2020, [online] (accessed 26 May 2020)

50 The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers. The FCA works with HM Treasury.

51 The Prudential Regulation Authority (PRA) is part of the Bank of England and responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm.

22 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

4. The Bill: insolvency provisions The financial impact of the Covid-19 crisis is expected to result in many companies facing insolvency. The Bill contains six insolvency measures to support businesses. These measures conveniently fall into two sets: permanent and temporary changes to insolvency law.

The aim of the permanent measures is to support businesses in financial difficulty. While these measures are of relevance during the ongoing emergency, the changes they make to the insolvency regime are intended to be permanent. This set of measures (previously announced by the Government, and in development before Covid-19) consist of the following:

• Introduction of a free-standing moratorium for UK companies

• Widening of the “ipso facto” suspension provisions

• Creation of a new restructuring plan

The aim of the temporary measures is to support all businesses during the pandemic. These retrospective changes to insolvency law consist of the following:

• Temporary suspension of wrongful trading liability

• Temporary suspension of statutory demand provisions and a restriction on winding-up petitions (2 measures)

Both the permanent and temporary insolvency measures are considered in detail below.

Also included in this set of temporary measures are two corporate governance measures. They are as follows:

• Flexibility on holding Annual General Meetings (AGMs) and other meetings.

• Extending filing deadlines at Companies House.

These corporate governance measures are considered in Section 5 of this briefing paper.

4.1 Permanent insolvency measures The Bill’s permanent measures would add a new corporate restructuring package to insolvency law. This new rescue package is very much based on the US Chapter 11 rescue procedure.52

The EU also intends to introduce a similar company rescue package when it implements its Restructuring Directive (2019/1023). In brief, this Directive seeks to introduce a minimum standard among EU Member States for preventive restructuring frameworks available to debtors in financial difficulty and to provide measures to increase the efficiency of restructuring procedures. These new standards, once implemented, will represent a move for EU Member States further in the direction of debtor-in-possession-type insolvency regimes like chapter

52 See footnote 22

23 Commons Library Briefing, 1 June 2020

11 in the United States. Member States must implement the Directive into national law by 17 July 2021, subject to one-year extension.

Introduction of a moratorium Current law

At present there is no free-standing moratorium available for UK companies.

What would the Bill do?

The Bill would introduce a free-standing moratorium, giving financially distressed but still viable companies a breathing space in which to prepare to restructure, seek new investment, or pursue other rescue options. During this moratorium, no legal action could be taken by creditors against the company without leave (i.e. permission) of the court. It is thought vital to introduce the moratorium now to help companies in financial difficulty as a direct result of the pandemic. If enacted, this measure would extend to the whole of the UK and would commence the day after Royal Assent.

Clause 1 of the Bill would introduce a new Part A1 to the IA 1986. This new Part A1 is made up of eight chapters, which sets out details for determining whether a company is eligible for a moratorium, how a moratorium is obtained, the length of a moratorium, the effects of a moratorium, and details regarding the role of the monitor.

The moratorium proposed in the Bill bears similarities to the existing administration moratorium,53 but would be overseen by a “monitor” who must be a licensed insolvency practitioner. The monitor’s role would be limited to ensuring that the company complies with the requirements of the moratorium and approving sales of assets outside the normal course of business, as well as approving any grant of new security (i.e. charge) over the company’s assets. The moratorium must end if it becomes apparent to the monitor that the company is unlikely to be rescued.

The proposed moratorium would allow directors to be involved in the rescue of their own company since they would retain responsibility for running the business on a day-to-day basis. Effectively, it is a “debtor-in-possession” procedure, with the company being the debtor. According to BEIS, the aim is to provide struggling companies with:

a streamlined moratorium procedure that keeps administrative burdens to a minimum, makes the process as quick as possible and does not add disproportionate costs on to struggling businesses.54

Chapter 1 of new Part A1 would insert a new Schedule ZA1 into the IA 1986, this schedule sets out which companies would be eligible for the moratorium. Companies would be generally eligible, unless excluded.

53 Schedule B1 to the Insolvency Act 1986 contains the statutory moratorium that applies

to an insolvent company in administration. The moratorium protects the company against creditor action (including the commencement of legal proceedings) except with the consent of the administrator or court. A summary of company administration can be found at Section 1.1 of this briefing paper

54 Explanatory Notes, p.4 (para.6)

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However, companies would be ineligible if at the date of filing for a moratorium:

• the company is already subject to a formal insolvency procedure (including a moratorium that is in force at the date of filing);

• during the period of 12 months prior to the filing date, it has been subject to a moratorium, unless the court has ordered that the previous moratorium is not to be taken into account for this purpose;

• during the period of 12 months prior to the filing date, it has been subject to CVA or administration (for a temporary period this restriction is lifted by Schedule 4 to account for the impact of Covid-19 pandemic).

Crucially, ineligibility on the basis that a company has been subject to a moratorium during the 12 months prior to the filing date, would be temporarily lifted during the Covid-19 response period.

Before a company could enter a moratorium, its directors must make a statement that the company is, or is likely to become, unable to pay its debts. Further, the proposed monitor must make a statement that it is likely that a moratorium would result in the rescue of the company as a going concern. Both statements are intended to ensure the moratorium is used appropriately. However, it is important to note that the requirements on “prospect for rescue” (i.e. monitor’s statement), bringing the moratorium to an end, and certain of the exclusions for entry will be temporarily amended to account for the Covid-19 crisis.

According to the Bill’s Explanatory Notes, an overseas company would only be eligible for a moratorium if it is one which could be wound up under Part 5 of the IA 1986. It is anticipated that the courts would exercise the same discretion when considering such an application as they would when considering the winding-up of an overseas company. Even during Covid-19, an overseas company will need to apply to the court for a moratorium, to ensure that it is within the jurisdiction of the UK courts before receiving the protection of a moratorium.

The Bill provides that the duration of the moratorium would be for an initial period of 20 business days. Directors would be able to extend the moratorium for a further 20 business days if they file a notice and certain other documents at court. This could not be done until the last five business days of the initial period of the moratorium. Any extension of the moratorium beyond 40 business days would require the consent of the creditors or the court.

During the moratorium, no creditor legal action could be taken against the company. Except in certain circumstances (e.g. a director presenting a winding-up petition, or a public interest winding-up petition presented by the Secretary of State) no insolvency proceedings could be commenced against the company during the moratorium period. However, creditors would have the benefit of the following safeguards:

25 Commons Library Briefing, 1 June 2020

• A moratorium must be supervised by a monitor (an insolvency practitioner) who must bring the moratorium to an end if the company does not abide by its rules.

• If the monitor becomes aware that any officer of the company has committed an offence in relation to the moratorium, the monitor must report the matter to the appropriate authority 55 and provide such information as that authority may require.56

• During the moratorium, a creditor or member of the company may apply to the court on the grounds that the company’s affairs, business, and property are being or have been managed in a way that has unfairly harmed the interests of its creditors or members generally or some in particular; or that any act or proposed act or omission causes or would cause such harm. The court may make any order it thinks fit, including bringing the moratorium to an end, regulating the management of the directors, or requiring the directors to stop taking the action complained of.

• All suppliers must continue to be paid during moratorium. If in any doubt, the monitor must bring the moratorium to an end or cancel the supply contract.

These safeguards are obviously intended to stop any abuse of a moratorium and ensure that creditors’ rights are not overly infringed.

Offences are detailed in the Bill’s new Part A1. In brief, an officer of the company will commit an offence if they make a false representation, or fraudulently do, or omit to do, anything, for the purpose of obtaining a moratorium or an extension. There are also general offences which include, during a moratorium or within 12 months leading up to a moratorium, an officer of the company:

• concealing company property to the value of £500 or more,

• concealing any debt due to or from the company,

• fraudulently removing company property to the value of £500 or more,

• concealing or destroying any document affecting or relating to the company’s affairs,

• or pawning, pledging or disposing of any property obtained on credit (unless it is in the ordinary course of business).

It is a defence to some of these general offences for a person to prove that they had no intent to defraud or, for other of the offences specified, that they had no intent to conceal the state of affairs of the company.

55 In the case of a company registered in England or Wales, the appropriate authority

is the Secretary of State; in the case of a company registered in Scotland, it is the Lord Advocate

56 In the case of an unregistered company, the appropriate authority is: (I) if it has a principal place of business in England and Wales but not Scotland, the Secretary of State; (ii) if it has a principal place of business in Scotland but not England and Wales, the Lord Advocate, and (iii) if it has a principal place of business in both England and Wales and Scotland, the Secretary of State and the Lord Advocate; (iv) if it does not have a principal place of business in England and Wales or Scotland, the Secretary of State.

26 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

The aim of this moratorium is to facilitate company rescue. However, it would be free-standing, meaning it would not be a gateway to any particular insolvency procedure. Possible rescue outcomes might include:

• recovery of the company without further action or process (e.g. the simple injection of new funds might be enough to rescue the company during the moratorium without having to enter any insolvency procedure);

• sale and/or refinancing of the company outside insolvency;

• a CVA is agreed between the company and its creditors (under part 1 of the IA 1986);

• a scheme of arrangement is agreed between the company and its creditors (under Part 26 of the Companies Act 2006); or

• a restructuring plan is implemented under the new Part 26A of the Companies Act 2006.

New Part 26A restructuring plan Current law

The Bill provides for a new restructuring plan modelled on the existing scheme of arrangement procedure contained in Part 26 of the CA 2006. As outlined in section 1 of this paper, although schemes can be effective in supporting the restructuring of a company (particularly in respect of large companies), it lacks the power to impose a restructuring plan on an entire class of dissenting creditors or members.

What would the Bill do?

To support viable companies struggling with debt, the Bill would introduce a new restructuring plan, modelled on the existing scheme of arrangement procedure but with the addition of the ability to cram down across classes of creditors, which is a feature of US Chapter 11 bankruptcies. According to BEIS, the new rescue plan is likely to be of most help to large companies dealing with complex debt structures.

Specifically, clause 7 and Schedule 9 of the Bill would insert new Part 26A into the CA 2006, which sets out the arrangements for a company to enter into a restructuring plan. If enacted, this restructuring measure would extend to the whole of the UK and come into force the day after Royal Assent.

The restructuring plan would be instigated by the company. It would be available to the same types of corporate entity as a scheme of arrangement and would apply to the same type of situation: where a compromise or arrangement is proposed between a company and its creditors or members or any class of them. A crucial difference with the new restructuring plan is that it would only be available where the company “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.57 In addition, the purpose of the plan

57 New section 901A(2), Companies Act 2006

27 Commons Library Briefing, 1 June 2020

must be “to eliminate, reduce, prevent or mitigate the effect of any of these financial difficulties”. 58

Creditors would vote on the restructuring plan in separate classes, which would resemble those that currently feature in schemes of arrangement. The plan would require the approval of a minimum of 75% in value in each class of those voting.59 However, it would be for the court to grant final approval to the plan if it thinks the plan is “fair and equitable” and in the interests of creditors. Crucially, the plan can be approved by the court even where one or more classes do not vote in favour. This is the principal point of difference between a new Part 26A restructuring plans and existing schemes of arrangement.

However, for a court to sanction a restructuring plan, despite it not having been agreed by 75% in value of a class of creditors or a class of members (“the dissenting class”), the following conditions must apply:

• The court is satisfied that if the plan were to be sanctioned, none of the members of the dissenting class would be any worse off than under a relevant alternative. The relevant alternative is “whatever the court considers would be most likely to occur in relation to the company if the plan were not sanctioned.”

And

• At least 75% by value of a class of creditor or members (i.e. one class), which would receive a payment or have a genuine economic interest if the relevant alternative were pursued, had still voted in favour of the plan.60

BEIS describes the involvement of the court in respect of these “cross-class cram down” provisions as follows:

As in the case with Part 26 schemes of arrangement, the court will always have absolute discretion over whether to sanction a restructuring plan. For example, even if the conditions of cross-class cram down are met, the court may refuse to sanction a restructuring plan on the basis it is not just and equitable. 61

It is important to note that under the provisions of the Bill, every creditor or member whose rights are affected by the compromise or arrangement must be permitted to participate in a court-ordered meeting, unless none of the relevant class of creditors or members have a genuine economic interest in the company.

Cross-class cram down provisions are obviously a key feature of the new restructuring plan. Other features to note include:

• it would stand alongside the existing scheme of arrangement process;

• it would be available to both solvent and insolvent companies (although the company must be in financial difficulties);

58 New section 901A(3)(b), Companies Act 2006 59 Unlike in a scheme of arrangement, votes on a Part 26A plan will be calculated

solely by the value of the relevant creditors’ debt or members’ share 60 New section 901G(1)-(5), Companies Act 2006 61 Explanatory Notes, p.36

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• it would bind both secured and unsecured creditors (unlike a CVA); and

• since the CA 2006 provisions implicitly bind the Crown,62 any arrangement or reconstruction agreed and implemented under new Part 26A would also necessarily be binding on the Crown.

The new restructuring plan could operate independently of the new moratorium. However, it might be an option for companies once they have the protection of the short-term moratoria. BEIS explains the relationship between the two measures as follows:

As long as the eligibility criteria for the new moratorium are met, it will also be available (but not mandatory) to use whilst the company develops a restructuring plan providing a streamlined restructuring process and allowing a restructuring plan to be developed free from enforcement action.63

Again, according to BEIS, the Government intends that the "overall commonality" of the provisions in Parts 26 and 26A of the CA 2006 (i.e. between existing schemes of arrangement and the new restructuring plan) will enable the courts "to draw on the existing body of Part 26 case law where appropriate".64

Finally, it should be noted that this new Part 26A would not apply to certain companies providing financial services.

Ipso facto (termination) clauses in supply contracts Current law

Under common law there is no right of termination of a contract in the event of insolvency or financial difficulty. This must be expressly provided for in the contract. Clauses in contracts which permit the termination of the contract by a party due to the bankruptcy, insolvency, or financial condition of another party are called “ipso facto” or termination clauses.

For suppliers, who are unsecured creditors, the benefit of ipso facto clauses is obvious. Continuing to perform a contract (supplying goods or services) to a party who is insolvent, or likely to become so, puts the supplier at risk of losing money. In the event of insolvency, the supplier may only recover a fraction of the debt owed (so many pennies in the pound) if anything at all. However, for a company in financial difficulty, the fact that supplies can suddenly stop because of the triggering of an ipso facto clause, can jeopardise attempts to rescue the business.

Section 233A(1) of the IA 1986 already prohibits termination of a contract by utility, communications, and IT suppliers on the basis of an insolvency related term in their contract. This provision would be retained. However, the Bill would introduce additional provisions to the IA 1986 to widen the scope of the restriction to supply contracts for all other types of goods and services (unless exempted).

62 An Act does not bind the Crown unless it does so expressly or by necessary implication 63 Explanatory Notes, p.6 (para.15) 64 Explanatory Notes, p. 6 (para. 16)

29 Commons Library Briefing, 1 June 2020

It is significant that rather than adapting the existing regime and amending the definition or designation of what an “essential supply” is, the Government has opted for a new blanket regime, whereby certain termination clauses are banned. This move is more in-line with the US approach to so-called “executory contracts” in Chapter 11 proceedings.65

BEIS gave the following explanation to the policy intention behind this measure:

“[…] to help companies trade through a restructuring or insolvency procedure, maximising the opportunities for rescue of the company or the sale of its business as a going concern. The measures will complement the policy for a new moratorium and restructuring plan procedure, which are aimed at enhancing the rescue opportunities for financially distressed companies.66

What would the Bill do?

Clause 12 of the Bill would insert two new sections 233B and 233C and Schedule 4ZZA into the IA 1986. Section 233B prohibits the use of termination and other insolvency related clauses in contracts for the supply of goods and services unless exempted under Schedule 4ZZA. Section 233C includes powers to amend both section 233B and the exemptions listed in Schedule 4ZZA by regulations (made under the affirmative procedure). If enacted, the measure would extend to the whole of the UK and would commence the day after Royal Assent.

In effect, these additional provisions would widen the scope of the restrictions on the use of ipso facto (or termination) clauses in supply contracts. This would prevent a much wider range of suppliers from terminating a contract due to a company entering any one of the following “relevant insolvency procedures”:

• A new statutory moratorium, as set out in Part A1 of the IA 1986 (see above)

• Administration

• The appointment of an administrative receiver (unless another administrative receiver was already in office)

• A CVA approved under Part 1 of IA 1986

• A liquidation

• The appointment of a provisional liquidator (unless another provisional liquidator was already in office).

• The court orders meetings to vote on a new Part 26A restructuring plan.

This prohibition would apply whether the termination clause in question operates automatically or requires an election to be made or notice given by the other party.67 Further, the Bill provides that where the supplier was contractually entitled to terminate the contract or supply

65 Importantly, the clauses in the Bill would cover only supplier arrangements, not

general commercial contracts 66 Explanatory Notes, p.8 67 New section 233B(3)

30 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

before the company went into an insolvency process, because of an event occurring before the insolvency process, the supplier cannot then exercise that termination right once the company is in the insolvency process.68

Consequently, suppliers would have to continue to fulfil their commitments under their supply contract, enabling the struggling company to continue trading whilst it formulates a rescue plan. A supplier cannot demand payment of outstanding pre-insolvency charges as a condition of continuing supply.69 However, the supplier must be paid during the restructuring of the company. A significant qualifier to the effect of these provisions is that the supplier can still terminate the contract if one of the following applies:

• An officeholder (i.e. an administrator, administrative receiver, liquidator or provisional liquidator appointed over the insolvent company) agrees.

• Where the company is subject to a moratorium, CVA, or Part 26A restructuring plan, and the company agrees.

• The court grants permission, being satisfied that the continuation of the contract would cause the supplier hardship.70

In considering an application by a supplier to terminate a supply contract on the grounds of undue financial hardship, the court must assess:

• whether or not the supplier would be more likely than not to enter an insolvency procedure as a result of being compelled to continue supply; and

• whether exempting the supplier from the obligation to supply would be reasonable in the circumstances having regard to the effect of non-supply on the debtor company and the prospects of rescue.

For suppliers, this financial hardship protection would be a safeguard of last resort. However, the threshold would be high; a supplier would only be able to seek an exemption from the court if continued supply threatens its own insolvency.

Importantly, clause 13 of the Bill contains a temporary exclusion for small suppliers, as a time-limited Covid-19 related measure. To qualify as a “small supplier”, at least two of the following conditions must apply:

• the supplier’s turnover was not more than £10.2 million (or an average of £850,000 each calendar month if the supplier is in its first financial year);

• the supplier’s balance sheet total was (or is) not more than £5.1 million; and

68 New section 233B(4) 69 New section 233B(7), this would not apply to (and so would not conflict with) the

ability of a utilities provider to ask the insolvency office holder to guarantee payment under section 233(2) of the Insolvency Act 1986

70 New section 233B(5)

31 Commons Library Briefing, 1 June 2020

• and the number of the supplier’s employees was (or is) not more than 50.

The period for which this exclusion applies begins with the day on which this Act comes into force and ends on 30 June 2020 or one month after the coming into force of this Act, whichever is later. During this temporary exclusion period, small suppliers can still rely on ipso facto (termination) clauses that would otherwise be invalid under new section 233B of the IA 1986. However, where a company enters into an insolvency process after the exclusion period expires, entities of all sizes which supply the company will be bound by the provisions unless otherwise exempted. That said, there is a power in the Bill to reduce or extend this exemption period.

New Schedule 4ZZA to the IA 1986 provides for the companies and services which are excluded from the provisions. They are predominantly financial services and essential services covered by pre-existing provisions of the IA 1986.

It is the Government’s view that all three permanent insolvency measures contained in the Bill (i.e. new moratorium, restructuring plan, and Ipso facto clauses) require accelerated introduction (fast-track) to give companies the best chance of surviving during the Covid-19 pandemic and beyond.71

4.2 Temporary measures As outlined above, the Bill also contains three temporary insolvency measures. All three have retrospective effect and would expire on 30 June 2020 (or one month after the Bill coming into force) but there is power in the Bill to extend some provisions if necessary. Importantly, all three measures are there to help businesses cope with Covid-19 related financial difficulties, to trade on and survive the crisis. The measures are summarised below.

Suspension of liability for wrongful trading Current law

Directors are under a statutory duty to exercise reasonable care and skill in the management of the company. When a company is solvent, its directors are under a duty to act in the best interests of the company and its shareholders. When insolvent, directors have a duty to act primarily in the interests of the company’s creditors. This obligation on directors to consider the interests of creditors also applies to shadow and “de facto” directors.

It is the director’s responsibility to know whether the company is trading while insolvent. They must consider not only the company’s balance sheet (and balance sheet solvency), but also the company’s ability (actual and expected) to pay its debts as and when they fall due. Under section 214 of the IA 1986,72 directors can be held personally and

71 Explanatory Notes, p.16 72 The wrongful trading provisions are contained in sections 214 and 246ZB of the

Insolvency Act 1986 for liquidation and administration respectively in Great Britain and

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legally responsible for continuing to trade while insolvent. This is known as the offence of wrongful trading (see Box 1 below).

In effect, insolvency practitioners can to apply to the court for a declaration that directors of the company in liquidation or administration are liable to personally contribute to the assets of the company. A declaration would be made where the directors allowed the company to continue trading beyond the point at which the insolvency procedure was inevitable and did not take steps to minimise potential losses to creditors. In many cases, it is directors’ potential exposure to personal liability which influences the decision to put a company into liquidation.

Box 1: Wrongful trading

There are circumstances in which directors of an insolvent limited liability company can be held personally liable for the company’s debts. Section 214(2)(b) of the Insolvency Act 1986 outlines the offence of wrongful trading. A director may be liable to contribute personally to the assets of the insolvent company for the benefit of its creditors if:

“..at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.”

In effect, wrongful trading occurs when the director knew or ought to have concluded before the company became insolvent that there was no reasonable prospect of avoiding insolvency yet continued to trade. Action under this section would be taken by the liquidator in conjunction with specific orders from the court. Wrongful trading is a statutory offence under section 214 and section 246ZB of the Insolvency Act 1986. If, after the company has gone into insolvent administration or liquidation, it appears to the court that a director has failed to comply with this duty, the court can order the director to make such contribution to the company’s assets as it thinks appropriate. It should be noted that the Small Business, Enterprise and Employment Act 2015 (Section 246ZB) extends the powers to take action against directors for wrongful trading (which previously were only available to a liquidator) to an administrator.

Only directors can be liable for wrongful trading (unlike fraudulent trading). “Director” is widely defined by the IA 1986 to include any person occupying the position of director, by whatever name called. This means that a “de facto” director or a shadow director may be liable for wrongful trading. The person must be a director of the company at the time he knew (or should have known) that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration. In other words, a director who resigns from office may still be liable for any wrongful trading that took place during his/her time in office.

Dishonesty is not required; in other words, there is a lower burden of proof for wrongful trading than that required to prove fraudulent

Article 178 of the Insolvency (Northern Ireland) Order 1989 for liquidation in Northern Ireland

33 Commons Library Briefing, 1 June 2020

trading. It is a civil, not criminal, offence. Crucially, a person held liable for wrongful trading may also be the subject of a disqualification order under the Company Directors Disqualification Act 1986.

However, there is a statutory defence. A court will not make an order for wrongful trading if, knowing there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, the director took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken (sections 214(3) and 246ZB(3) of the IA 1986).

Further detailed information is provided in a separate Library briefing paper, “Company insolvency: potential liabilities of directors”(CBP 936).

What would the Bill do?

The Bill would temporarily remove the threat of personal liability arising from wrongful trading, for directors who continue to trade a company through the current crisis with the uncertainty that the company may not be able to avoid insolvency in the future. Liquidators and administrators would not be able to take an action against an insolvent company’s directors for any losses to creditors resulting from continued trading while the wrongful trading rules are suspended.

The suspension would apply retrospectively from 1 March 2020 to 30 June 2020 or one month after the coming into force of this Act, whichever is the later (subject to an extension by order if appropriate). The measure would extend to the whole of the UK.

It is important to note that clause 10 of the Bill would not formally amend the IA 1986, but would alter how the relevant sections of the Act would be applied in relation to a company’s financial position during the “relevant period” (i.e. the suspension period). Specifically, under subsection (1) the court would not hold a director responsible for any worsening of the financial position of the company or its creditors during the relevant period. There is no requirement to show that the company’s worsening financial position was due to the crisis created by the Covid-19 pandemic.

BEIS has already said that if the impact of the pandemic on businesses continues beyond the end of the initial three-month period, it may be extended for up to six months using secondary legislation, and that process may be repeated, extending the suspension period further.73 If, however, the pandemic is no longer having an impact on businesses, the period of suspension may also be ended.74 BEIS explained the policy objective as following:

The objective of this measure is to remove the deterrent of a possible future wrongful trading application so that directors of companies which are impacted by the pandemic may make decisions about the future of the company without the threat of becoming liable to personally contribute to the company’s assets if it later goes into liquidation or administration. This will in turn

73 Clause 39 of the Bill 74 Explanatory Notes, p.8

34 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

help to prevent businesses, which would be viable but for the impact of the pandemic, from closing.75

An obvious fear is that by removing this deterrent, directors may be encouraged to engage in reckless behaviour. However, all other “checks and balances” that help to ensure directors fulfil their legal duties properly are to remain in force.

The Government’s overriding aim is to stop a wave of insolvencies based on directors’ fear of personal liability for wrongful trading (i.e. trading whilst technically insolvent due to Covid-19 crisis). BEIS described the policy intention behind this measure as follows:

The current crisis caused by the Covid-19 pandemic means that there is a great deal of uncertainty around trading conditions, both in the immediate and longer-term future. Directors are having to make decisions about the future viability of their companies and whether it is appropriate for trading to continue.

[…]

According to the Government, this temporary suspension of wrongful trading liability will give company directors assurance that they will not be held personally liable for using their best efforts to continue to trade the company during this emergency, should the company ultimately fail. By doing this, the directors of companies that would be viable but for the uncertainty caused by Covid-19 will be more likely to continue a company’s trading. If legislation is not brought forward as soon as possible (i.e. by fast tracking the Bill), it may trigger a wave of unnecessary insolvencies.76

It should be noted that under Schedule ZA1 to the IA 1986, directors in certain financial services firms and public-private partnership project companies are excluded from the temporary suspension of wrongful trading.77

4.3 Voiding of statutory demands and restriction on winding up petitions (2 measures)

Current law

As a result of national lockdown many companies have suddenly found themselves in a position where they are unable to pay their suppliers and commercial landlords. Effectively, they are insolvent on a cash flow basis. This has brought the issue of directors’ obligations and the action that can be taken by unpaid creditors into sharp focus.

A widely used debt enforcement option used by creditors owed £750 or more is to issue a statutory demand. This is a written demand for payment;78 the debtor company has 21 days in which to comply with the demand, if it fails to do so (and assuming it has no legal right to refuse payment), the company is at risk of having a winding-up

75 Explanatory Notes, p.8 76 Explanatory Notes, p.16 77 Clause 10(4) of the Bill 78 Section 123(1)(a) or 222(1)(a) of the Insolvency Act 1986

35 Commons Library Briefing, 1 June 2020

petition issued against it on the grounds that it is unable to pay its debts.79 In effect, a statutory demand is a means of exerting pressure on a company to pay a debt; it is the first step taken by a creditor who intends to wind-up the company.80 Once a compulsory liquidation order is made by the court, a liquidator will be appointed to wind-up the company.81

As BEIS points out in the Explanatory Notes, petitioning for the winding up of a company should be a last resort, only used when all other approaches to recover the debt have failed. The courts do not look on it as a debt recovery process, rather that the company cannot pay its debts and should be wound up.

As outlined in section 2.3 of this briefing paper, the Government has introduced measures in the Coronavirus Act 2020 that are intended to support businesses and protect them from the effects of the current crisis. In order to protect businesses from eviction by landlords, the Act created a moratorium on commercial landlords enforcing the forfeiture of leases for unpaid rent.82 This moratorium lasts until 30 June 2020 but can be extended if necessary. Following the introduction of this moratorium, the Government has become aware that some landlords have been using other methods, including statutory demands followed by winding-up petitions, to put pressure on their commercial tenants to pay outstanding rent immediately. The risk is that other creditors will follow this lead and attempt to use these processes for debt collection purposes.83 To stop a wave of insolvencies, the Government wants to stop aggressive action by those creditors who are using statutory demands and winding-up petitions to recover debts against viable companies caught in the covid-19 crisis.

What would the Bill do?

Clause 8 introduces Schedule 10 into the Bill. Under paragraph 1 of this Schedule, no petition for the winding up of a company (both registered and unregistered) can be presented on or after 27 April 2020 on the grounds that the company has failed to satisfy a statutory demand, if the relevant statutory demand was served during the period beginning with 1 March 2020 and ending with 30 June 2020 or one month after the Bill comes into force, if later).84

79 Section 122(1)(f) Insolvency Act 1986 80 Sections 122, 123, 124, 127 and 129 of the Insolvency Act 1986, and rules 7.3, 7.10

and 12.39 of the Insolvency (England and Wales) Rules 2016, and, in Scotland, the Insolvency (Scotland)(Receivership and Winding-up) Rules 2018 and Rules of Court, relate to the opening of winding-up proceedings against a company. In Northern Ireland, the Insolvency (Northern Ireland) Order 1989 and the Insolvency Rules (Northern Ireland) 1991 make equivalent provision to England and Wales.

81 Rule 7.10 of the Insolvency (England and Wales) Rules 2016 requires that where a petition is presented then notice of that petition must be advertised in the London Gazette, separate rules apply in Scotland, but advertisement of the petition is still a requirement

82 Section 82, Coronavirus Act 2020 (England and Wales) and section 83 (Northern Ireland. Provision for Scotland is made by paragraph 7 of Schedule 7 of the Coronavirus (Scotland) Act 2020

83 Explanatory Notes, p.6 84 Paragraph 1, Schedule 10, to be deemed to have commenced on 27 April 2020

36 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

In addition, under paragraphs 2 and 3 of Schedule 10, a petition cannot be presented by a creditor during the period beginning with 27 April 2020 (it has retrospective effect) until 30 June 2020 or one month after the coming into force of this Bill, whichever is the later, unless the creditor has reasonable grounds for believing that:

(a) coronavirus has not had a financial effect on the debtor company, or

(b) the debtor company would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor.

Again, this measure would apply to registered and unregistered companies. In effect, during the restriction period, any creditor asking the court to make a winding-up order against a company on the grounds that it is unable to pay its debts must first demonstrate to the court that the company’s inability to pay its debts was not caused by the coronavirus pandemic. The court has already indicated that it will require credible evidence on this issue and will not simply accept sweeping statements.

Paragraph 4 of Schedule 10 includes a provision to rectify situations where, following the announcement of the measure, but in advance of its enactment, a petition has been brought under the pre-existing law. Specifically, the court is given power to make a remedial order to restore the position as if the petition had not been presented.

This conditional restriction on presenting a winding-up petition overlaps in effect with the blanket prohibition on petitions based on a prior statutory demand (under paragraph 1 of Schedule 10). Presumably the more onerous blanket prohibition would take priority in relation to petitions based on a prior statutory demand.

37 Commons Library Briefing, 1 June 2020

5. The Bill: corporate governance provisions

The Bill’s temporary corporate governance measures are relatively straightforward. The measures, which would apply both retrospectively and prospectively, are intended to increase the flexibility of companies during the current crisis, allowing them to focus time and resources on what is important in order to survive. Given the precise technical nature of company law, this section of the paper relies heavily on the Explanatory Notes.

5.1 Holding of Annual General Meetings (AGMs) and other meetings

Current law AGMs and general meetings (GMs) are considered central to good governance. A company may be required by legislation or its constitution to take certain key decisions by passing a resolution of the members of the company (e.g. a change to the company’s articles of association). Public companies can only pass a resolution of the members by holding a GM85 and others may be required to do by their articles of association. Members also have the right to require directors to call a GM.86

Under section 336 of the CA 2006, public companies have a statutory duty to hold an AGM within six months of the end of their financial year and private traded companies have a statutory duty to hold an AGM within nine months.87 In addition, the company’s own constitution may stipulate certain requirements for holding AGMs (e.g. that physical meetings be held in a certain place). Mutual societies and charitable incorporated organisations may also be required to hold an AGM, or other meetings, by legislation or their own constitution or rules.

Assuming the Government’s Covid-19 restrictions on movement and gatherings remain in place in the coming months, it will be difficult for companies and other bodies to hold physical AGMs or other meetings in accordance with their constitution or rules; having hundreds of individuals in a room is not permitted under the statutory restrictions on public gatherings. Some PLCs (and other entities) may have constitutions which allow flexibility in how AGMs are held - but not all.

What would the Bill do? For a temporary period, the Bill would give companies and other bodies greater flexibility as to how AGMs and other meetings are held. Specifically, clause 35 and Schedule 14 of the Bill would temporarily allow meetings to be held by other means (for example, a “virtual”

85 Section 281, Companies Act 2006 86 Section 303, Companies Act 2006 87 Failure to comply is a criminal offence under section 336, Companies Act 2006

38 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

meeting with proxy or electronic voting) even if their constitution or rules would not normally allow it.

These temporary measures would apply from 26 March 2020 to 30 September 2020. However, there is a power to extend that period by up to three months at a time by the “relevant national authorities”, but the period cannot be extended beyond the end of the current 2020/21 financial year (5 April 2021).

To offer further flexibility, the Bill would also extend the period within which companies and other bodies must hold an AGM. In effect, the “AGM season” would be extended to the end of September 2020, meaning companies and other bodies could postpone their AGM beyond the current deadlines contained in legislation or their constitution and rules. There are powers in the Bill which would allow a further extension of the period within which the AGM may be held.

Importantly, these measures would mean that directors would not be exposed to liability for failing to hold an AGM in accordance with a company’s constitution or acting without shareholder endorsement. A couple of points are worth noting. First, the Government is not mandating how companies and other bodies should hold an AGM; they have the flexibility to decide this for themselves. However, the Government expects these bodies to adopt best practice and continue to engage with their members prior to, during and following meetings (including responding to shareholders’ questions sent in by electronic or other means). BEIS suggests companies should consider holding “shareholder days” later in the year (assuming the current Covid-19 restrictions are lifted), so the board can engage with shareholders.88

The second point is that shareholder rights are preserved. The fact that shareholders will still be able to vote by proxy or by post means that directors will still be held to account on big decisions. Guidance on the holding of AGMs during the Covid-19 crisis has been published by the Chartered Governance Institute.89

5.2 Filing Requirements Current law Companies and other entities are required to make different filings by fixed deadlines at Companies House each financial year. Missing the deadline can result in a financial penalty. Given the trading difficulties presented by Covid-19, companies can already apply to Companies House for an automatic three-month extension to the deadline for filing their accounts.90 Over 50,000 companies have already done so.91

88 “BEIS issue Q&A on holding AGMs”, ICAS, 28 April 2020, [online] (accessed 26 May

2020) 89 The Chartered Governance Institute, “AGMs and Impact of Covid-19”, supplement

guidance note, 27 March 2020, [online] (accessed 26 May 2020) 90 Department for Business, Energy and Industrial Strategy, “Companies to receive 3-

month extension period to file accounts during Covid-19”, press release, 25 March 2020, [online] (accessed 26 May 2020)

91 Financial Conduct Authority, “Financial services exemptions in forthcoming Corporate Insolvency and Governance Bill”, 14 May 2020 [online] (accessed 26 May 2020)

39 Commons Library Briefing, 1 June 2020

According to BEIS, Companies House has now done all it can under existing law to offer extensions to filing deadlines92 but companies may need more help.93

What would the Bill do? Clauses 36, 37 and, 38 of the Bill would temporarily make further extensions to filing requirements.

Clause 36 would provide for a temporary extension to the period within which a public company must file its accounts and reports with Companies House, where such accounts are required by section 442 of the CA 2006 to be filed on a date that occurs between 26 March 2020 and 30 September 2020 or the last day of the period of 12 months following the end of the relevant accounting reference period (whichever is earlier).

In these circumstances, the period allowed for the directors to comply with their obligation to file the accounts will be taken to be (and always to have been) a period that ends on the earlier of 30 September 2020, and the last day of the period of 12 months immediately following the end of the relevant accounting reference period. BEIS provides the following example, if a public company’s accounting reference period ends on 1 December 2019, so that under section 442 of the CA 2006, the directors must file the company's accounts and reports with Companies House on or before 1 June 2020, the deadline will be extended to 30 September 2020.94

Clause 37 of the Bill would temporarily confer a power on the Secretary of State to make regulations which extend deadlines for lodging certain filings with Companies House, such as confirmation statements, including event-driven filings that are required to be submitted in advance of the confirmation statement, accounts and registrations of charges.

The Secretary of State already has discretion to extend the period for filing accounts under section 442(5) of the CA 2006 upon an application being made if there is a “special” reason. However, the power in clause 37 is broader than this discretion, it gives the Secretary of State a power to extend the deadlines for the various filing requirements listed in clause 38. The relevant filing deadlines which may be subject to extension includes:

92 Public and listed companies have recently been granted other concessions, namely:

(i) by the FCA, for listed companies, an extra two months by which to publish their annual financial report; (ii) for companies traded on AIM, an extra three months by which to publish their annual financial report. (See, Financial Conduct Authority, “Statement of policy: Delaying annual accounts during the coronavirus crisis”, 26 March 2020 and London Stock Exchange, “Inside AIM: Coronavirus- Temporary measures for publication of annual audited accounts”, 26 March 2020).

93 Department for Business, Energy & Industrial Strategy, HM Revenue & Custom, The Insolvency Service, Health and Safety Executive, Office for Product Safety and Standards, and the Rt Hon Alok Sharma MP, Press Release, “Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19”, 28 March 2020, [online] (accessed 26 May 2020)

94 Explanatory Notes, p. 44-45 (para. 269)

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• company accounts, under Part 15 of the CA 2006;95

• annual confirmation statements under Part 24 of the CA 2006;96

• notices of related relevant events under the CA 2006; and

• registration of charges under Part 25 of the CA 2006.97

Where these powers are exercised, the extended filing period must not exceed:

• 42 days, in a case where the existing filing period is 21 days or fewer, and

• 12 months, in a case where the existing filing period is 3, 6 or 9 months.98

If a filing deadline is extended by the Secretary of State using the power in clause 37, it would apply to all relevant companies (or other entity) without them needing to apply. In other words, a company would not need to make an application, there would be a blanket extension. Clause 37(8) of the Bill provides that the power conferred to the Secretary of State by clause 37 will expire on 5 April 2021.99

95 Section 442, Companies Act 2006 96 Section 853A(1), Companies Act 2006 97 Section 859A or section 859B, Companies Act 2006 98 Clause 37(9) of the Bill 99 Under clause 37(9), the expiry of the power will not affect the continued operation of

any regulations made under clause 37 for the purpose of determining the length of any period that begins before the expiry

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6. Views of stakeholders

6.1 Permanent insolvency measures According to BEIS, the Bill is broadly supported by businesses and by those involved in corporate restructuring and insolvency. R3 (the Association of Business Recovery Professionals) said the Bill represented the biggest change to the UK’s insolvency and restructuring framework for almost twenty years. An extract from R3’s response is reproduced below:

Having called for corporate insolvency reforms since 2016, we welcome the introduction of the Bill to Parliament.

The measures contained in the Bill will support the profession’s efforts to help businesses navigate the enormous economic damage caused by the pandemic – this legislation comes not a minute too soon.

The new tools will add to the options available to insolvency and restructuring professionals trying to rescue businesses and will enhance the UK’s globally recognised insolvency and restructuring framework.100

Various stakeholders (including the Insolvency Lawyers’ Association and the City of London Law Society) broadly support the introduction of new tools (i.e. moratorium and new restructuring plan) into the UK’s corporate rescue regime. However, some commentators have suggested that these measures may be “too complex and disproportionately expensive for widespread use by SMEs,” and as a result SMEs may “continue to rely on other parts of the insolvency toolbox”.101

Others have suggested102 that the new tools should not be freestanding but should instead be included into the current administration regime by the addition of a new schedule, applicable only where the administrator is pursuing the first purpose of company rescue (i.e. to save the company as a going concern):

This approach could balance the adequate protection of creditors by administrators and the courts with concerns that more powerful company rescue tools may be needed for large corporate restructurings in the next decade.103

Moratorium and new restructuring plan Given the current trading difficulties caused by the pandemic, R3 was particularly pleased that the moratorium would apply to insolvent businesses, giving them the space to review their options free from creditor action:

We are also pleased our feedback on the draft proposals has been taken on board by the Government. Previously, for example, the moratorium would only have been open to solvent businesses, but

100 “The Corporate Insolvency and Governance Bill – R3 Response”, Business Money, 21

May 2020, [online] (accessed 26 May 2020) 101 “Wrangling reform into the insolvency toolbox”, Sarah Paterson & Mike Pink, R3

Recovery publication, summer 2019, [online] (accessed 26 May 2020) 102 Ibid 103 Ibid

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now the legislation will enable insolvent businesses to obtain a breathing space to review their options, free from the risk that a creditor may push the company into an insolvency procedure prematurely. This greatly increases the number of struggling but potentially viable businesses who could benefit from a vital breathing space and will help to repair the economic devastation caused by the pandemic.

We appreciate that in producing this Bill, the Government has condensed a process that usually takes more than year into just a few weeks. The profession will therefore be keen to examine the detail of the legislation, but overall, will welcome this positive step forward.104

As outlined on pages 26-28 of this paper, the new restructuring plan would involve a two-stage court process similar to the existing process for schemes of arrangement under the CA 2006. Some commentators have highlighted the complexity of this process and questioned how it falls into the category of “emergency help” that companies need during the current crisis.

Taken together, the company moratorium and the restructuring plan have attracted comments about their likely impact on creditors. In its response105 to the 2016 and 2018 consultations, the Government said that it would attempt to strike a balance when introducing these insolvency changes between protecting companies from short-term liquidity challenges and ensuring that creditors get the best return possible in those circumstances. Some commentators have suggested that the balance is likely to favour debtor companies more than creditors. This would be of concern to those creditors whose own businesses may also be at risk because of Covid-19 related liquidity and operational pressures.106

Ipso facto clauses In respect of the restricted use of ipso facto (termination) clauses in supply contracts, some legal commentators have suggested that there may be a trend towards negotiating earlier termination triggers in contracts. This could defeat the purpose of ensuring continuity of supply.107

6.2 The Bill’s temporary insolvency measures The Insolvency Lawyers Association welcomed the Government’s temporary insolvency measures and thought the measures would help more businesses survive the current crisis:

We welcome and support these proposals. Suspending wrongful trading, in particular, will assist directors in accessing Government or bank funding without concerns regarding personal liability. The insolvency profession in the UK is hugely talented and these

104 “The Corporate Insolvency and Governance Bill – R3 Response”, Business Money, 21

May 2020, [online] (accessed 26 May 2020) 105 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate

Governance – Government Response, 26 August 2018, [online] (accessed 26 May 2020)

106 “Covid-19 changes announced to UK insolvency law and for AGMs”, Shearman and Sterling perspectives, 31 March 2020, [online] (accessed 26 May 2020)

107 Ibid

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reforms, together with existing rescue tools such as administration, could really assist in saving livelihoods.108

The British Chambers of Commerce (BCC) thought it “sensible” for the government to protect viable companies weakened by the pandemic. It said:

It is right that the rules on wrongful trading are temporarily suspended to ensure that directors are not penalised for doing all they can to save companies and jobs during this turbulent period. Companies that were viable before the outbreak must be supported to ensure they can help power the recovery when the immediate crisis is over. Cashflow remains an urgent concern for many businesses, so it’s vital that government support packages reach businesses and people on the ground as soon as possible.109

Temporary suspension of wrongful trading Prior to Alok Sharma’s announcement on 28 March 2020, and in the context of Covid-19, there had been calls on the Government to act quickly to amend wrongful trading laws to help prevent corporate failures. For instance, the Institute of Directors, said:

We’re calling on the government to prioritise jobs and business survival by relaxing existing insolvency obligations put on directors and thereby providing business leaders greater room for manoeuvre at this critical juncture. We should not allow a single viable business to go to the wall because of this crisis.110

The Confederation of British Industry (CBI) also lent its support to the temporary suspension of the wrongful trading deterrent:

The CBI welcomes these interventions at a critical time for business. The temporary suspension of wrongful trading provisions, along with other measures, will give much needed headroom for company directors to enable otherwise viable businesses to use the government’s support package and weather this crisis.111

Others, including PwC, argued that changes to the wrongful trading rules should help alleviate much of the anxiety directors are facing in relation to ongoing trading decisions.112 However, some stakeholders, including R3, have expressed concern about the temporary suspension of the wrongful trading deterrent. R3 said:

The profession will have some serious concerns about the government’s plans to suspend wrongful trading. A blanket ban

108 Department for Business, Energy & Industrial Strategy, HM Revenue & Custom, The

Insolvency Service, Health and Safety Executive, Office for Product Safety and Standards, and the Rt Hon Alok Sharma MP, Press Release, “Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19”, 28 March 2020, [online] (accessed 26 May 2020)

109 British Chambers of Commerce press release, BCC responds to changes to insolvency laws, 28 March 2020, [online] (accessed 26 May 2020).

110 “UK eyes insolvency law reforms”, Financial Times, 25 March 2020 [online] (accessed 26 May 2020)

111 Department for Business, Energy & Industrial Strategy, “One-page summary of Corporate insolvency and Governance Bill – one- page summary”, not online

112 TRI press release, “Industry responds to wrongful trading suspension,” 30 March 2020 [online] (accessed 26 May 2020)

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could risk abuse. The provisions are there for a reason and protect creditors.113

Various commentators have suggested that the proposed relaxation of the wrongful trading rules should be treated with caution by directors, and that they should remain vigilant about their conduct, as other legal risks continue to exist.114 In particular, the threat of director disqualification continues as a deterrent against director misconduct. The Institute of Chartered Accountants in England and Wales (ICAEW) has cautioned directors of companies in financial difficulty to seek professional advice:

This is a pragmatic move and a useful addition to the government’s strategy to protect employment and will definitely help some businesses to survive. But we would encourage any directors with concerns about their company to seek professional advice at the earliest opportunity.115

Corporate governance measures According to BEIS, the Institute of Directors broadly welcomes the Bill’s temporary corporate governance measures:

“We [the IoD] welcome flexibility for companies on their annual meetings during the coronavirus crisis.”116

“The IoD has been working with BEIS and The Insolvency Service to get these measures over the line – will be welcomed by directors who are doing everything they can to keep going.”117

Interestingly, before publication of the Bill, shareholder groups had raised concerns about overall arrangements for meetings. “ShareAction”118 had written to FTSE100 companies suggesting that virtual AGMs should be held this year, followed by physical meetings in due course. They noted that under existing arrangements, some physical meetings were “set to be held with just the minimum of participants, with no opportunity for shareholders to question the board in real time”.119 While temporary arrangements were in place elsewhere – such as Germany and Australia – some participants had raised concerns that some companies might use online approaches to control shareholder input, not least by managing live discussion of questions.120

113 Ibid 114 For example: fraudulent trading (which can impose criminal as well as civil liability

on directors); misfeasance (i.e. wrongdoing or misapplication of funds by directors); and the law on antecedent transactions (i.e. transactions at an undervalue and preference whilst a company is insolvent)

115 ICAEW (Institute of Chartered Accountants in England and Wales), “ICAEW comment on changes to insolvency rules”, 28 March 2020, [online] (accessed 26 May 2020)

116 Department for Business, Energy & Industrial Strategy, “One-page summary of Corporate insolvency and Governance Bill – one- page summary”, not online

117 Ibid 118 ShareAction is a charity that promotes responsible investments 119 Financial Times, “Companies urged to hold virtual AGMs to give shareholders a say”,

20 April 2020 [online] (accessed 26 May 2020) 120 Financial Times, “Investors fear virtual AGMs will shift the balance of power”, 12 April

2020 [online] (accessed 26 May 2020)

45 Commons Library Briefing, 1 June 2020

7. Business and insolvency statistics

7.1 Impact of coronavirus on UK businesses The coronavirus outbreak has led to a decline in business activity and revenue across many sectors causing a large negative shock to the economy. The average forecast for quarterly GDP growth in Q2 (April–June) was -16% based on an HM Treasury survey of investment banks, economic research organisations and other institutions in May 2020.121 However, estimates are highly uncertain – including on the extent to which the economy will ‘bounce back’.122 Full discussion of the economic impacts and forecast scenarios is provided in the Library briefing paper, Coronavirus: Effect on the economy and public finances (CBP8866, 22 May 2020). The latest data is covered in the regularly updated Library paper, Coronavirus: Latest economic data (CBP 8878).

With businesses seeing declining turnover while still facing fixed costs, such as rent and wages, some are likely to face cash flow issues, even with the government schemes that support many of them

The Office for National Statistics (ONS) Business Impact of Coronavirus Survey (BICS) reported that between 20 April and 3 May 2020, 79% of businesses that responded were continuing to trade and 20% had temporarily closed or paused trading.123 Northern Ireland had the highest rate of businesses temporarily paused trading (25%), London and the South East had the lowest level (both 16%). The industries that had the largest proportion of businesses that had temporarily paused trading were the accommodation and food service (78%) and arts, entertainment and recreation sectors (80%). A small number of businesses (less than 1%) responded that they had permanently ceased trading in the period.

Of the businesses that continued to trade, 61% reported that their turnover had decreased, with 25% reporting that turnover had fallen by more than 50% (see the chart below). Almost all businesses (99%) reported coronavirus as being the reason for turnover outside of normal range. The largest falls in turnover were in the accommodation and food services sector, with 62% of businesses reporting turnovers falling by more than 50%. There was little variation between regions and nations in the UK for businesses reporting decreased turnover.

121 HM Treasury, Survey of independent forecasts for the UK economy: May 2020, 20

May 2020. Figures shown here are rounded to the nearest percent. 122 OBR, Coronavirus reference scenario, 14 April 2020; Bank of England, Monetary Policy

Report, 7 May 2020. 123 ONS, Coronavirus and the economic impacts on the UK: 21 May 2020; ONS, Business

Impact of Coronavirus Survey (BICS) Wave 4 (20 April – 13 May 2020). Of 18506 businesses in the UK surveyed in Wave 4, 6196 businesses (33.5%) responded. The data is unweighted (each business assigned the same weight regardless of turnover or size). Figures shown here are rounded to the nearest percent.

46 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

Source: ONS, Business Impact of Coronavirus Survey, Wave 4 (20 April – 13 May 2020). Note: Turnover unaffected includes business reporting that turnover was affected but within normal range.

Of businesses that had not permanently stopped trading, 85% had applied for at least one government financial support scheme; 79% of those receiving Government support said that it had helped them continue to trade. The Coronavirus Job Retention Scheme (CJRS) was the most highly used scheme of the businesses responding, with 76% of responding business applying to the scheme (see chart below). For more information about the Government’s support schemes, see the Library paper on Coronavirus: support for businesses (CBP 8847)

Source: ONS, Business Impact of Coronavirus Survey, Wave 4. Percentage of surveyed businesses that had not permanently stopped trading that have applied to Government schemes.

0%

10%

20%

30%

Decreased morethan 50%

Decreasedbetween 20%

and 50%

Decreased lessthan 20%

Unaffected Increased

61% of businesses reported decreased turnoverBusiness turnover, 20 April – 3 May 2020

0% 20% 40% 60% 80%

Coronavirus JobRetention Scheme

Deferring VAT

Business rates holiday

HMRC Time To Pay

Accredited financeagreement

England and devolvedgrants and loans

Which Government schemes have businesses applied to?20 April – 3 May 2020Which Government schemes have businesses applied to?20 April – 3 May 2020

47 Commons Library Briefing, 1 June 2020

Of businesses continuing to trade, 4% said they had no cash reserves and 43% said they had less than 6 months cash reserves (see chart below). There was little variation between regions and nations in the UK, or by company size for businesses’ cash reserves.

Source: ONS, Business Impact of Coronavirus Survey, Wave 4.

7.2 Insolvency statistics In 2019, there were about 17,000 new company insolvencies in England and Wales, 1,000 in Scotland and 300 in Northern Ireland.124

The most common kind of company insolvencies are creditors’ voluntary liquidations (where shareholders of a company agree that the company be wound up), followed by compulsory liquidations. Administrations and company voluntary arrangements (CVAs) are less common.

124 The Insolvency Service, Company Insolvency Statistics, January to March 2020, 30

April 2020. Figures are provisional.

0%

10%

20%

30%

None Less than 1month

1 to 3months

4 to 6months

More than6 months

Not sure

4% of businesses reported no cash reservesBusiness cash reserves, 20 April – 3 May 2020

Number of company insolvencies, 2019

England & Wales

ScotlandNorthern

Ireland

New creditors' voluntary liquidations 12,058 313 90

Compulsory liquidations 3,001 634 186

Administrations 1,814 81 21

Company voluntary arrangements 351 1 17

Receivership appointments (admin receiverships for NI) 1 2 0

Total 17,225 1,031 314

Source: The Insolvency Service, Monthly insolvency statistics, April 2020, 15 May 2020

Total for England and Wales excludes creditors' voluntary liquidations following administration

Figures are provisional

Figures for Scotland are experimental

Notes:

48 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

In 2019/20 there were 67 schemes of arrangement registered at Companies House, although this figure should be treated with some caution as it is based on unaudited management information from records entered manually by examiners.125

Recent trends

Data up to April 2020 suggests that company insolvencies have not yet risen as a result of the coronavirus pandemic, although the figures may have been affected by delays in processing insolvencies due to the lock down.126

Forecasts

We cannot know how many companies will become insolvent as a result of the coronavirus pandemic, although the number is thought likely to rise. Demand for insolvency advice has risen in the legal sector.127

125 Companies House (via correspondence) 126 Based on experimental statistics for England and Wales, and Scotland only. Source:

The Insolvency Service, Monthly insolvency statistics, April 2020, 15 May 2020 – figures for May will be published on 12 June.

127 Based on reports from Bank of England agents in the weeks leading up to the publication of the Bank of England Monetary Policy Report, 7 May 2020

49 Commons Library Briefing, 1 June 2020

Annex: territorial extent & application of the Bill [Table A - reproduced from the Explanatory Notes to the Bill]

50 Commons Library analysis of the Corporate Insolvency and Governance Bill [HC 2019-21]

BRIEFING PAPER Number 8922 1 June 2020

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