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Coronavirus - Corporate Insolvency and Governance Bill – UK/Northern Ireland

  • Ireland
  • Northern Ireland
  • General

29-05-2020

The Government has now published the much anticipated Corporate Insolvency and Governance Bill (the “Bill”), which will introduce various new corporate restructuring tools as well as the temporary changes to insolvency law that have been announced by the Government since the onset of the COVID-19 pandemic.

The Bill’s passage through Parliament is being expedited in response to the economic impacts of the pandemic and is expected to come into force in early June. In Northern Ireland, it is anticipated that the Minister for the Economy, Diane Dodds, will bring a legislative consent motion to the Northern Irish Assembly to approve the Northern Ireland amendments in the first week of June. We summarise the Bill’s insolvency provisions, both temporary and permanent, below. More detailed analysis of those provisions is (or will be) contained in separate briefings.

View our series of articles summarising the Bill

Restriction on statutory demands and winding-up petitions

Suspension of liability for wrongful trading

Temporary amendments to Insolvency Law

Restriction on statutory demands and winding-up petitions

The Bill gives the following temporary relief from the effects of statutory demands and winding-up petitions until a month after the Bill comes into force:

- a creditor cannot rely on an unpaid statutory demand to present a winding-up petition, unless the statutory demand was served on the debtor before 1 March 2020.

- a creditor may still present a winding-up petition, as long as it is not based on a statutory demand served after 1 March 2020, and provided that the creditor has reasonable grounds for believing either that: (i) coronavirus has not had a financial effect on the debtor, or (ii) the debtor would have been insolvent even if coronavirus had not had a financial effect on it.

If it appears to the Court that coronavirus had a financial effect on the debtor before the presentation of the petition, it will only make a winding-up order if satisfied that the debtor would have been unable to pay its debts as they fell due even if coronavirus had not had that financial effect.

Winding-up orders made on or after 27 April 2020 will be void if the Court would not have made the order had the Bill been in force.

For winding-up petitions presented on or after 27 April 2020, the automatic avoidance of asset dispositions during the period between presentation and a winding-up order will be suspended.

In Northern Ireland, the Bankruptcy Master is currently not accepting the issue of any new winding up petitions at the present time, and save perhaps for exceptional circumstances, the Master is not making any winding up orders at the present time.

Suspension of liability for wrongful trading

The Bill will alter how a director’s liability for wrongful trading during the coronavirus pandemic will be assessed:

In the event that a director is found liable for wrongful trading, in considering what contribution (if any) the director should make to the company’s assets, the court will assume that the director was not responsible for any worsening of the company’s financial position between 1 March 2020 and one month after the coming into force of the Bill.

Permanent changes to Insolvency Law

Free-standing Moratorium

To promote the rescue culture, the Bill introduces free-standing moratoriums for eligible companies, the main features of which are:

A moratorium can be obtained by the directors filing certain documents at Court or, if a winding-up petition is outstanding, making an application to Court (although this provision is disapplied during the coronavirus pandemic)

The initial period of a moratorium is 20 business days, although this can be extended with creditor consent to up to a year, or to a date at the discretion of the Court.

The directors remain in control of the company, but an insolvency practitioner will be required to act as “monitor”.

The monitor must provide a statement that the moratorium is likely to result in the rescue of the company as a going concern, must keep this assessment under review and must bring the moratorium to an end if rescue as a going concern ceases to be likely.

During the moratorium:

- winding-up petitions cannot be presented, except by the directors

- administrators and administrative receivers cannot be appointed (except for administration appointments by the directors)

- landlords cannot exercise forfeiture by peaceable re-entry, except with the permission of the Court

- no steps may be taken to enforce security or repossess goods subject to hire-purchase agreements, except with the permission of the Court

- no legal process may be instituted, carried out or continued, except for employment related proceedings or with the permission of the Court

- no proceedings can be brought in respect of pre-moratorium debts, nor can creditors apply to the court for permission to bring such proceedings.

Supply of goods and services

Importantly, there are some Northern Ireland-specific amendments made in this regard, to bring the position more into line with changes made in Great Britain a number of years ago in relation to essential supplies, utilities, and goods and services. By clause 14, the Bill makes amendments to Article 197 of the Insolvency (Northern Ireland) Order 1989, to apply Article 197 to new categories of electricity provider and to suppliers of IT goods and services and to cover cases where utility supplies are made by a landlord. Clause 15 of the Bill inserts a new Article 197A into the Insolvency (Northern Ireland) Order 1989. Article 197A will apply to the same range of utility supplies as Article 197 and will prevent the supplier relying on any clause in a contract which would entitle the supplier to terminate the contract or the supply, or do anything else (such as raising the price) where the customer enters administration or a company voluntary arrangement.

The Bill extends the protection of supply of goods and services to companies in relevant insolvency proceedings, so that non-essential supplies are protected:

Insolvency termination clauses (or other clauses triggered by insolvency) in a contract with a company in an insolvency process (including a free standing moratorium) will be ineffective

Suppliers cannot make the payment of an outstanding debt incurred before the insolvency process a condition of ongoing supply

A supplier may only terminate a contract for supply with the consent of the insolvency practitioner or the company (depending on the relevant insolvency process), or if the Court is satisfied that continuation would cause the supplier hardship

Recovery plans

The Bill introduces arrangements and reconstructions for companies in financial difficulty, which complement (but offer greater flexibility than) schemes of arrangement, as follows:

A 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 may propose a compromise or arrangement with its creditors or members, or any class of them.

The proposal may include measures to eliminate, reduce, prevent or mitigate the effect of the financial difficulties and may be combined with a free-standing moratorium to protect the company while stakeholders consider the proposal.

Votes in respect of the rescue plan require the approval of 75% in value of a class of creditors or members, and there is no requirement that this includes 50% of that class in number, so that rescue plans are less likely to be frustrated by a large number of creditors with low-value debts.

Even if a class of creditors or members votes against it, the court can still sanction a rescue plan if: (i) it is satisfied that the dissenting creditors or members would not be financially disadvantaged by it; and (ii) the plan is supported by at least one class that would receive a payment or have a genuine economic interest in the company if the plan were not sanctioned.

If you have any queries about the Bill, please contact a member of the Eversheds Sutherland Northern Ireland Restructuring and Insolvency team.

For further information, please contact:

Matthew Howse, Partner in our Dispute Resolution & Litigation department - matthewhowse@eversheds-sutherland.ie

Damian McElholm, Senior Associate in our Banking & Financial Services department - damianmcelholm@eversheds-sutherland.ie

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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