2020-07-29
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Corporate Insolvency and Governance Act 2020

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Posted by Elizabeth Taylor on 29 July 2020

Elizabeth Taylor - Insolvency Lawyer
Elizabeth Taylor Consultant

Much has been written and discussed about the Corporate Insolvency and Governance Bill 2020 since its publication in May 2020 and its passage through Parliament at break neck speed.  Numerous amendments were proposed and debated along the way.  The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on 26 June 2020 subject to a number of amendments and we have set out below the most significant of these.

  1. Throughout the Bill, various temporary measures were effective by reference to a relevant date which was defined as 30 June 2020 or one month after to coming into force of the Act. In all such instances the relevant date has been redefined as 30th September 2020.  As such it is not possible to present a winding up petition based upon non-compliance with a statutory demand served between 1 March 2020 and 30 September 2020.  A winding up petition cannot be presented upon any ground between 27th April 2020 and 30 September 2020 unless it satisfies the new coronavirus test*.  A new practice direction sets out how this will work and more detail on this can be found below.  The period during which no director can be found liable for wrongful trading is also extended such that it now runs from 1 March 2020 until 30 September 2020.  The extension until 30 September 2020 ties in with other measures designed to mitigate against the effects of coronavirus due to expire on the same day including the prohibition on forfeiture of commercial leases.  
  2. The proposed new section 174A of the Insolvency Act 1986 has been amended such that it prevents lenders relying upon acceleration clauses in the event of a moratorium to gain super priority in the event of winding up proceedings within 12 weeks of the end of the moratorium. The section as originally drafted would have allowed a lender to rely on a clause which rendered a loan repayable in full if the company obtained a moratorium and was then entitled to super-priority for the entire balance ahead of preferential creditors, floating charge creditors and the remuneration of a subsequently appointed liquidator.

  3. The Bill included requirements to provide notice and information to creditors in respect of an application for a moratorium or a new arrangement or reconstruction under Part 26A of the Companies Act 2006. Creditors were also entitled to challenge actions of the directors or the monitor.  These rights to information and rights to challenge are now extended in the Act to the the Pensions Regulator and Board of the Pension Protection Fund (as appropriate).

  4. Paragraph 60A of Schedule B1 of the Insolvency Act 1986 included a power on the part of the Secretary of State to make regulations prohibiting or imposing conditions upon the sale of property by an administrator to connected parties. The right to make such regulations expired on 26 May 2020 but has been resurrected in new Sections 8 and 9 of the CIGA.  Section 8 previously introduced Schedule 10 containing the temporary winding up provisions.  Schedule 10 is now referenced by Section 10 with consequential amendments to the remainder of the section numbers.

  5. Section 18 of the Bill contained wide powers to make regulations amending the CIGA at any time up to 30th April 2021, although by virtue of Section 22 that date could be extended by a year. The power to amend now appears in Section 20 and Section 24 provides that regulations amending the CIGA may be made at any time within the period of two years of the Act coming into force.    

Insolvency Practice Direction relating to the Corporate Insolvency and Governance Act 2020

The Practice Direction which also came into force on 26 June 2020 clarifies that where an application for a moratorium is submitted to the court using the e-filing system, it is deemed to have been filed on the date and time of the automated acknowledgment.

The remainder of the Practice Direction provides clarity on the procedure for issuing winding up proceedings under the temporary provisions in Schedule 10 of the CIGA.   

In addition to a requirement that the petition contains a statement that the coronavirus test is satisfied, the petition must also contain a summary of the grounds relied upon by the petitioning creditor in support of the statement.

When the petition is received by the court it will in the first instance be listed for a non-attendance pre-trial review with a time estimate of 15 minutes on the first available date after 28 days.  The purpose of the non-attendance pre-trial review is to enable to court to give directions for the listing of a preliminary hearing, the purpose of which is to determine whether the company is unable to pay its debts having regard to the requirements of the coronavirus test.  This clarifies the uncertainly as to who is to be responsible for scrutinising the petition to determine in the first instance whether the coronavirus test is satisfied.  However, a delay of over 28 days is immediately built into the petition process at this point with scope for much longer delays due to the increase in judicial workload.

Until the pre-trial review has taken place the petition may not be advertised, and there is no right to inspect the court file, but the petition should be served in accordance with Rule 7.9.

If the petitioning creditor wishes to rely upon any evidence in addition to that set out in the petition this should be served with the petition.  If the company wishes to serve any evidence in reply, it must do so within 14 days of service of the petition.

At the pre-trial review if the judge is satisfied that the petition is unopposed and it seems to the court that the coronavirus test is satisfied, the petition will be listed in the winding up list. It isn’t clear at this stage how the court will determine whether or not the petition is unopposed given that it will not have been served.

If there is evidence that the petition will be opposed or there is doubt as to whether the coronavirus test is satisfied, the petition will be listed for a preliminary hearing at which point the court will consider evidence from both sides.  If satisfied that the coronavirus test is satisfied the petition will be listed in the winding up list and if not, it will be dismissed.

Only once the court has given directions for the petition to be listed in the winding up list should the petition be advertised.

All petitions issued under this new procedure must be listed in one of the hearing centres detailed in para 3.6 of the Insolvency Practice Direction (namely Central London County Court or a specialist judge in one of the Business and Property Courts), so any petition issued in the County Court, including a court with insolvency jurisdiction, will be transferred.

Clearly these additional layers of procedure are going to add significant delay to the petition process and explain why it was necessary to change the deemed date of commencement of winding up to the date of the winding up order rather than the date of the issue of the petition.

[* The coronavirus test is set out in paragraph 5(2) of Schedule 10 which says that the court may only wind up a company on the ground that it is unable to pay its debts if satisfied that the facts by reference to which that ground applies would have arisen even if coronavirus had not had a financial effect on the company.]

Amendment to July 2018 Insolvency Practice Direction

One amendment has been made to the 2018 IPD as a consequence of the CIGA and this is in relation to the distribution of court business.  Paragraph 3.3 is amended so as to provide that any application in relation to a moratorium under Part A1 or an application concerning the protection of supplies of goods and services under section new Section 233B may be listed before a High Court Judge or an ICC Judge, but not a District Judge sitting in the High Court or County Court.

Guidance for Monitors

The insolvency Service has published guidance for monitors, a link to which can be found here

https://www.gov.uk/government/publications/insolvency-act-1986-part-a1-moratorium-guidance-for-monitors/test-doc

This guide sets out in a simplified format the provisions as set out in the CIGA and the temporary rules with very little in the way of expansion or clarification.  However, a couple of point are worthy of note.

  1. The guidance clarifies that there is nothing to prevent a monitor taking a subsequent insolvency appointment in relation to the company subject to compliance with the Code of Ethics, despite a subsequently appointed liquidator or administrator having the power to challenge the remuneration of the monitor.

An insolvency practitioner will need to purchase a specific penalty bond based on the value of the company’s assets for each appoint as monitor.  If he were to be appointed in a subsequent formal insolvency he will have to purchase another bond. Somewhat surprisingly, the guidance states that it is anticipated that only a small number of monitor appointments will result is a sequential insolvency appointment.  It was thought likely that requiring the specific penalty sum bond for the monitor to carry over to the sequential insolvency procedure could adversely impact premiums for the majority of monitor appointments where the company does not enter another insolvency procedure at the end of the moratorium.

About the author

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

Elizabeth Taylor

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

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