The Corporate Insolvency and Governance Act ("the Act") came into force on 26 June 2020. It can be seen here: Corporate Insolvency and Governance Act 2020 — UK
Two minute Q&A
Q: What are the key impacts from a real estate perspective?
A: Companies now benefit from a significant new set of temporary protections against creditors outside of the usual insolvency procedures:
- the ability to seek a 'moratorium' with a host of protections against insolvency and other actions;
- protection against creditors using statutory demands and winding up orders to pursue debts;
- the ability to seek a restructuring plan.
Q: When do the rules take effect?
A: The Act came into force on 26 June 2020 but it should be noted that certain elements of the Act have retrospective effective:
- the rules relating to winding up petitions take effect from 27 April 2020;
- statutory demands from 1 March 2020 onwards cannot be utilised in respect of winding up applications;
- the wrongful trading relaxation runs from 1 March 2020.
Q: How do the rules apply across the UK?
A: The Act covers Great Britain, with separate provisions for Northern Ireland (this note references the provisions relevant to Great Britain).
Q: Are there any other developments to be aware of?
A: The Government has also recently announced that:
- the 'forfeiture moratorium' provided for in s.82 of the Coronavirus Act 2020 (which prevents enforcement of a right of re-entry or forfeiture) is to be extended until 30 September 2020;
- Commercial Rent Arrears Recovery (CRAR) will not be capable of exercise unless 189 days rent is outstanding (so effectively CRAR will not be possible where two quarters rent is unpaid).
These provisions further constrain the remedies of a landlord against a defaulting tenant. For further reading please see: Coronavirus Act 2020: what does it mean for real estate?
This is a way in which companies in financial distress can obtain the breathing space that they need to explore the options available to them without any creditor action being taken against them. The moratorium offers companies protection from creditors and enables the company to explore rescue plans such as CVAs, restructuring plans. The moratorium has been described as 'freestanding' and operates separately from actual insolvency processes.
The process of obtaining a moratorium requires a court application (s.1 (1) (A3)). The application process requires a statement from the directors that the company is or is likely to become unable to pay its debts, and a statement from the proposed 'monitor' that the moratorium is likely to result in the rescue of the company as a going concern. The Act does not require that any particular evidence is provided to accompany such statements (s.1(1)(A6)).
For UK companies that are already subject to a winding up petition the court will only make the order for a moratorium if it is satisfied that a moratorium would achieve a better result for the company's creditors than if the company was wound up without being subject to a moratorium (s.1(1) (A4)).Note that some types of companies may not seek a moratorium (financial services, banks, insurance companies, as specified in Schedule 1).
The moratorium is overseen by the 'monitor' who must be an insolvency practitioner, however, the directors and officers of the business will continue to manage the business (s.1(1) (A35)). The moratorium period is initially 20 business days, but this may be extended by application to the court but monitor may end the moratorium if he believes the company is unlikely to be rescued (s.1(1) (A9)). The moratorium may be extended by application to the court (s.1(1)(A13)) or with/without creditor consent (s.1(1)(A10)/(A11)). The moratorium can be ended by the Monitor if he believes the company is unlikely to be rescued (s.1(1)(A38)).
The existence of the moratorium must be publicised (s.1(1) (A19)).
The moratorium confers the following protections on the subject company:
- no insolvency proceedings (including winding up and administration) can be commenced unless with the Court's permission (except where the director presents a winding-up petition, or a public interest petition is presented by the secretary of state) (s.1(1) (A20(1))). (Note that the key implication here in a real estate stetting is that a landlord may as a result not use a statutory demand to seek to recover arrears);
- no steps can be taken to enforce any security over the company's property without the permission of the Court (s.1(1)(A21(1)(c))) (In particular it should be noted that this may affect a landlord seeking to draw upon rent deposits);
- floating charges cannot crystallise (s.1(1)(A22(2)));
- no steps can be taken to repossess any goods in the company's possession under any hire-purchase agreement (s.1(1) (A21(1)(d)));
- a landlord or any other person to whom rent is payable may not exercise a right of forfeiture by peaceable re-entry, or in Scotland a right of irritancy, in relation to premises let to the company, except with the permission of the court (s.1(1)(A21(1)(a)/(b))), (it is interesting, if slightly circular, to reflect that this new form of moratorium is also likely not to fall within the commonly encountered definition of 'insolvency event' upon which many forfeiture clauses rely);
- no other proceedings (including execution or distress) can be commenced or continued during the moratorium (except those before an employment tribunal or those relating to claims between an employer and a worker, or those with the court’s permission (notably this cannot be for the enforcement of pre-moratorium debts for which the company has a payment holiday) (s.1(1)(A21(1)(e))) (Bear in mind this appears to affect landlords making debt claims and also exercise of CRAR).
The moratorium imposes the following key constraints on the subject company:
- security can only be given over a company's assets during the moratorium and will only be enforceable if the monitor consents to the security being given because he believes it would support the rescue of the company as a going concern (s.1(1)(A26(2)));
- the company cannot obtain credit of more than £500 from a person unless that person first has been notified that moratorium is in force for the company unless the person has been informed that a moratorium is in force for the company (s.1(1)(A25(1));
- the company can only make payment above a permitted limit (the greater of £5000 and 1% of the valued of the unsecured debts owed by the company at the start of the moratorium) in respect of a pre-moratorium debt if the monitor consents or the court has ordered the payment or the payment discharges security against property that has been disposed of without permission of the court (s.1(1)(A28(1));
- property that is not subject to security may only be disposed of if the disposal is in the ordinary course of business and the monitor consents or in pursuance of a court order (s.1(1)(A29(2)));
- property that is subject to security may only be disposed with the permission of the court, or if the disposal is in accordance with the terms of the security (s.1(1)(A29)(5)));
Comment: It is yet to be seen how the courts will approach the moratorium. As with insolvency procedures it will need to carefully weigh up the core objective of rescuing the company against the self-interest of a creditor (such as a landlord) seeking court approval to take a particular step. Furthermore, due diligence should now be undertaken to establish whether or not a particular company is subject to a moratorium before dealing with them and the writer is enquiring as to how the moratorium will be noted at Companies House.
Statutory Demands and Winding Up
The threat of winding up proceedings is removed in cases where there are debts relating to Covid-19.
The Act provides that statutory demands made against companies in the period between 1 March 2020 and 30 September 2020 cannot be used as a basis of a winding up petition at any point from 27 April 2020 (Sch. 10, Part 1, para. 1). The effect is to render toothless a statutory demand served during this period.
Creditors may still seek a winding up petition on the grounds that a company is unable to pay its debts, but in order to do so they have to have reasonable grounds for believing that coronavirus has not had a financial effect on the company, or the facts by reference to which the applicant relies would have arisen even if coronavirus had not had a financial effect on the company (Sch. 10 Part 2, para. 2).
Comment: A key tool for rent arrears recovery is (temporarily) lost to the landlord. The Act introduces a significant new layer of complexity and difficulty into the winding up process. Covid-19 has clearly had such a far reaching and pervasive effect upon the economy that such grounds are likely to be very difficult to establish, particularly for a third party without unfettered access to the books and records of the company.
The risk of personal liability for directors arising from 'wrongful trading' is temporarily suspended. Liquidators and administrators will not be able to pursue directors for losses resulting from continued trading during the period from 1 March 2020 – 30 September 2020. Such a provision will reduce the pressure on directors to close otherwise viable business so as to avoid personal liability.
The Act provides that when the court is considering whether a director is liable to contribute to a company's assets, it will not take into account any worsening of the financial position during this period (s.12(1)). Note that directors of financial services companies will not be protected by the wrongful trading measures (s.12(4)).
Comment: This provision is very widely drawn and is likely to affect the attitude of many directors to their fiduciary responsibilities during this period. Some commentators have drawn attention to the potential for injustice or abuse as a result.
Termination Clauses in Supply Contracts
Insolvency or restructuring can frequently mean suppliers can use provisions in a supply contract to stop supplying a company - this can hasten the downward spiral of the company.
Suppliers will now have to continue to supply companies even when they are in pre-insolvency arrears. The Act prohibits termination clauses in contracts for the supply of goods or services from being triggered on the basis of insolvency (s.14(3)).
Suppliers are not able to introduce the condition of making payment of the outstanding payment a condition of continued supply (s.14(7)).
Suppliers can apply to the court for permission to terminate the contract on the grounds of hardship, the contract can also be terminated by agreement with the company or an office-holder (s.14(5)).
There is an exclusion for small companies subject to certain financial tests (s.15(4)).
Comment: Whilst these provisions appear not to have great relevance to commercial leases they should be borne in mind in relation to less formal arrangements. Contracts dealing with the short term occupation of premises (e.g. licenses to occupy serviced office space) may be caught by this provision (though such agreements are likely to contain other routes to termination).
The measures apply where 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, and a compromise/arrangement (a restructuring plan) is proposed between the company and its creditors/members for the purposes of mitigating, reducing or preventing the financial difficulties (Sch. 9 para 1). In simple terms the restructuring plan will allow the company (with the court's approval) to bind dissenting creditors to the proposal.
Comment: It will be interesting to see how these provisions operate in the setting of companies with extensive property liabilities. It seems possible that a restructuring plan could be imposed on groups of landlord creditors who do not agree with the proposal (though it should be borne in mind that the Act does contain certain safeguards in this respect). Some commentators have pointed out that CVA's will likely retain their relevance – they require less court involvement, and smaller window in which they can be challenged. However for a company who desires to compromise with several groups of creditors all at once a restructuring plan may provide a useful route.
Finally, the Act also makes provision for special concessions in respect of corporate administration to allow companies to prioritise their focus on survival including temporary relaxations to enable companies and other qualifying bodies to hold annual general meetings in a virtual setting with electronic voting, extending the period in which companies can hold their AGM (s.37) and making provision for extended accounts (s.38) and information filing dates (s.39).