New details of legislation to curb corporate insolvencies

The Corporate Insolvency and Governance Bill 2020 is at the second stage before the UK Parliament.

It contains some measures that are permanent and have been a long-time in the offing, such as the moratorium, and some temporary Covid-19 related measures, to put a temporary stop on statutory demands and winding up petitions. 

Moratorium

This is similar to the system already operated in many other jurisdictions. It allows insolvent companies a bit of “breathing space” to come up with a rescue plan. There will be an initial 20 business day period during which no action can be taken against a company, except with permission from the court. This initial period can be extended. The company remains under the control of its directors during the moratorium period but will be overseen by a registered insolvency practitioner.

Suspension of Statutory Demands and Winding Up Petitions

The Act, when it passes, will be retrospective in effect. Any statutory demand served from 1 March up to the date one month after the Act comes in to force, will be completely ineffective in establishing that a company is apparently insolvent. A statutory demand served during that period cannot subsequently be relied on in a petition to wind the company up. The back-stop date of one month after the Act comes in to force might also be extended by further legislation. 

A winding up petition cannot be presented between 27 April (again, the provision is retrospective) and a date one month after the Act is passed (and again, this may be extended) based on the expiry of a statutory demand (served before 1 March) or based on the expiry of a charge for payment unless:

“the creditor has reasonable grounds for believing that—

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

(b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.”

In other words, there will be an onus on a winding up creditor to show that the Covid-19 crisis has not been instrumental in the company’s inability to pay. 

Alternative to Statutory Demands?

If a debtor is in Scotland there is a “short cut” alternative to a statutory demand commonly referred to as a “Blue Star letter” (based on the case of Blue Star Security Services (Scotland) Ltd 1992 SLT (Sh Ct) 80) whereby a creditor can demand payment of a sum due within a short period of time. If payment is not made, that can be relied on to establish apparently insolvency (under section 123(1)(e) of the Insolvency Act 1986). 

A winding up petition following upon this procedure will still not be permitted between 27 April and a date a month after the Act has passed unless:

“the creditor has reasonable grounds for believing that—

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

(b) the relevant ground would apply even if coronavirus had not had a financial effect on the company.”

Therefore it will still be necessary to persuade the court coronavirus has not had an effect on the company or the insolvency would have arisen, by failure to pay the debt, in the same way regardless of coronavirus. It will also remain to be seen whether the courts allow Blue Star letters. They do not go against the letter of the legislation, but clearly go against its spirit, given the suspension of statutory demands.

Analysis

Even though this Act has not yet passed, as it will be retrospective in effect the courts have already given some consideration to the impact of coronavirus on a company’s solvency and the factors that will be taken in to account. For more detailed on discussion on this point, click here.

Whether you are creditor seeking to enforce payment of a debt, or are a business unable to pay its debts as a result of the coronavirus situation, we have several solicitors in our Dispute Resolution team who will be able to advise you. We also work closely with a number of independent Insolvency Practitioners. 

Click here to contact one of our team if there are issues arising from this article that you would like to discuss.