The Corporate and Insolvency Bill was designed to grant greater protection to businesses. The Bill came into force on 26 June 2020 and became the Corporate Insolvency and Governance Act 2020 (‘The Act’).
The Act covers a broad spectrum of issues that businesses face during Covid-19. Firstly, a temporary suspension on winding up petitions against companies where they were based on statutory demands came into force. The Act also introduced a relaxation of the rules relating to companies being able to apply to the Court for a moratorium from their creditors (A moratorium being a period where the creditors can take no further action against the company). It is intended that the measure will encourage negotiations and compromise between a company and its creditors or that it provides a company time to source additional funding.
Furthermore, the Act suspends personal liability of directors for trading and failing to minimise their creditors’ losses where they know or ought to know that their business is insolvent (identified as Wrongful Trading). Wrongful trading is a provision under the Insolvency Act 1986 aimed at discouraging directors from unnecessarily prolonging trading to the detriment of creditors when formal insolvency is unavoidable. It applies to directors of a company that has entered into insolvent liquidation or administration. A director can be found liable for wrongful trading if prior to the liquidation or administration the director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration.
The impact of The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 is that the court is now required to assume that a director is not responsible for any worsening of the company’s financial position. This measure was introduced in March 2020 and was due to expire on the 30 September 2020. Given the ongoing financial suffering for companies caused by Covid-19, the government have decided to extend this from 26 November 2020 until 30 April 2021.
Whilst directors can take some comfort from the reintroduced suspension of wrongful trading, as this removes one threat of personal liability that they face. However, the actions of directors could still be subject to scrutiny if an insolvency proceeding is later commenced. Directors must therefore ensure they continue to adhere to their statutory duties, whilst continuing to trade. The government have also extended the suspension on the use of statutory demands and winding up petitions to 31 March 2021.
The extension of these measures are a welcomed move by the government, as this shall provide much needed relief for many businesses. As to whether these measures shall be further extended remains to be seen.