John Szepietowski Reviews the Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) was brought into force on 26 June 2020. The new legislation has introduced measures to aid companies facing financial difficulties due to the Covid-19 pandemic. The new measures have been focused on assisting debtors in preference to creditors, contrary to most existing insolvency legislation. These procedures require the cooperation of all stakeholders to maximise a company’s chances of survival amid the Covid-19 pandemic. Many of the new procedures have been put in place on a temporary basis in the hope that the effect of the coronavirus pandemic is not long-lasting.

Many of the new measures simply amend their predecessors by providing time extensions for filing documents at Companies House.  However, one of the most notable new measures is the standalone moratorium procedure which allows directors to remain in control of a company whilst pursuing rescue procedures other than insolvency. The directors of a company are able to apply for a moratorium for an initial period of twenty business days in which a licensed insolvency practitioner will be appointed to monitor the company’s affairs. Part of the insolvency practitioner’s role is to determine the likelihood of rescue for said company. During the moratorium, creditors are prevented from seeking enforcement action against the company. These measures have been implemented to provide companies with a fighting chance of survival during the pandemic.

Another beneficial provision for debtors is the extension of the prohibition on termination of ipso facto insolvency. This provision overrides a supplier’s right to issue a notice to trigger termination of a contract due to a company’s failure to adhere to the contractual terms. Although not all suppliers have the benefit of this right under the Insolvency Act 1986, quite often, suppliers threaten to utilise their right to terminate in a strategic move to get the company to fulfil the terms of the contract. However, the right to terminate has been stalled for the majority of suppliers under Section 233B Insolvency Act 1986, with limited exceptions included in Schedule 4ZZA of that act. Once again, this provision has been put in place to prevent companies from falling into insolvency as an implication of the impact of the coronavirus by safeguarding the cooperation of a company’s suppliers.

On the other side of the coin, suppliers are being placed in an unfavourable position as some will also be suffering financially due to the pandemic. This provision fails to protect suppliers who will potentially be left without stock or funds and without the remit to take action against guarantors or others. However, suppliers may apply to a court to obtain permission to terminate a contract on the basis of ‘hardship’ which has been loosely defined by the government as the possible insolvency of the supplier.

Please contact John Szepietowski at Audley Chaucer for details on this matter or any other legal topic

Larissa Bourgi

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