May 27, 2020

The Corporate Governance and Insolvency Bill

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It should be noted that the changes are not yet effective, as the bill is yet to be passed. This will likely happen imminently as the Bill gets the necessary approvals and passes through Parliament. A number of the provisions are, however, to have retrospective effect, meaning that when they do come into force, the dates in which some of the new rules kick in would be backdated.

The draft bill set out two corporate governance measures and six insolvency measures.

Corporate governance measures

1. Companies House filing requirements

Of note are the proposed temporary changes to be made company law in England and Wales, through a partial easing of the administrative and filing requirements imposed on companies and other bodies registered in England and Wales (largely contained in the Companies Act 2006) through permitting some additional flexibility for the Companies House filing of the following:

  • Confirmation Statements
  • Registers of Charges
  • Notification of changes to a companies’ directors and Persons with Significant Control (PSCs)
  • Accounts (with companies being invited to apply for a three-month extension to their current filing date.

By virtue of the 2006 Companies Act, companies are required to file prescribed documents by fixed deadlines at Companies House each year. Missing the deadline automatically results in a financial penalty and can result in criminal sanctions for the company's directors or the company being struck off the register of companies. Extensions of time have already been offered to companies and the guidance has been released by the Registrar of Companies House, but the Bill allows the Secretary of State to temporarily make further extensions to deadlines.

The extended period for the filing must not exceed:

  • 42 days, in a case where the existing period is 21 days or fewer, and
  • 12 months.

2. Annual General Meetings (AGMs) and General Meetings (GMs)

Businesses are also to be afforded greater flexibility regarding the holding of closed AGMs and General Meetings GMs, even where their constitution would not normally allow for this. Shareholders rights to vote are not being waived, and greater freedom has been provided for such rights to be exercised digitally, eliminating the need for physical attendance. These rules will extend to charitable incorporated organisations and mutual societies, and are to have retrospective effect from 26 March 2020.

The principal aim of the temporary relaxation of these requirements is to afford business greater flexibility at a time where resources are stretched, while allowing a window of reprieve for the people behind the business to focus their efforts on ensuring its survival.

Insolvency measures

The Bill will also look to introduce a number of changes to the laws of insolvency, and afford a greater number of options for distressed companies (with the exception of certain financial service firms who are excluded from the Bill) to allow a greater opportunity for restructure in an effort to resolve issues with creditors (i.e. people to whom the company in questions owes money, for example suppliers). Some of the key proposals are listed below:

1.  Temporary company moratorium

Any insolvent companies, or any companies that are likely to become insolvent can benefit from an initial 20 business day moratorium in which they will be able to restructure or look to obtain new investment, through making an application backed up by a statement from the directors that the company is already, or is likely to become insolvent, and it is subsequently likely, in the view of a licensed insolvency practitioner appointed to the case (referred to as a "Monitor"), that such a moratorium is likely to save the company as a going concern. This initial 20 business day period may be extended with the consent of the creditors, or by an order of the court, so long as such a request for extension is made in the first 15 business days of the moratorium period. The existing creditors of the company will not be able to bring actions against the company during this period, although they will be able to call into question the personal actions of the directors and the Monitor if they believe that they have been unfairly prejudiced.

2.  A prohibition on supplier termination clauses

The Bill proposes the introduction of a permanent change to the use of termination clauses in supply contracts. The effect of this change will be that where a company has entered into an insolvency or restructure process, or has otherwise obtained a moratorium as set out in (1) above, the suppliers of the company will not be able rely on a termination clause in any supply contracts with that company in an effort to terminate the agreement, or otherwise vary its terms. Additionally, the distressed company will not need to pay any outstanding amounts due for past supplies whilst in the process of devising a rescue plan.

Suppliers are afforded some protection through the right to relieve themselves of the obligation to continue to supply to the company in question if it is likely to cause them hardship.

3.  New restructuring plan

The Bill sets out a new restructuring plan to be introduced, which provides another option for distressed companies, whereby they will be allowed to propose a new restructuring plan to their creditors. The creditors will then vote on the plan in separate classes, with the requirement for not less 75% in value of each class involved to vote in favour of the plan. The ultimate decision, however, will rest with the court, who will have discretion to approve a plan even where entire classes of creditors have voted against it, and if the court so decides, they will be bound to this. In reaching such a decision, the court will look at whether it is just and equitable to approve such a plan.

It is hoped that this will increase the number of companies who are able to devise a rescue plan as opposed to being drawn into a process of liquidation.

4.  A temporary freezing of statutory demands and winding up petitions

The Bill contains a number of provisions which will prevent the bringing of statutory demands and winding up petitions against companies where the debt remains outstanding due to the Covid-19 pandemic.

The effect of this is extremely broad, with creditors being prevented form bringing a petition from 27 April 2020 until the later of 30 June 2020, or one month after the Bill comes into effect, unless the creditor has reasonable grounds to suggest that coronavirus has not had a financial effect on the company by which it is owed, or the company by which it is owed would not have been able to satisfy its debts even if coronavirus had had no effect on them.

A creditor will also be unable to bring a petition on or after 27 April 2020 for the winding up of a company if this relates to a failure by the company to satisfy a statutory demand if this was served between 1 March 2020 and 30 June 2020.

5.  Temporary ceasing of personal liability for wrongful trading

The Bill is to temporarily suspend, for a period of three months (from 1 March to 30 June 2020) the wrongful trading provisions contained within the 1986 Insolvency Act (Insolvency Act). These provisions impose a personal liability on directors of insolvent companies where they have continued to trade despite there being no reasonable prospect of avoiding insolvency, and in so doing, the liabilities of the company have been increased. This will prevent liquidators and administrators from bringing claims against directors in a personal capacity for losses arising as a result of wrongful trading during the stated time frames, however, it should be noted that a directors broader duties (set out largely in the Companies Act 2006) will continue as normal, allowing for liquidators and administrators to potentially look to bring claims against directors for breaching these duties.

This is one of the key introductions of the Bill, and although only temporary, effectively removes one of the key measures which has been applied since the introduction of the Insolvency Act with the purpose of limiting directors from recklessly increasing the liabilities of a company that has no prospect of being saved from insolvency. The impacts will, however, largely hinge upon the approach taken by the courts to any alleged breaches of a director's broader duties in this time, and how robustly directors can be pursued for breaches of such duties in this period.

Our observations

While the proposed changes set out in the draft bill are welcomed because it gives directors some breathing room during the current crisis. The proposed temporary measures should make it possible for directors to effectively evaluate decisions and reduce the prospect of becoming cash flow insolvent.

It is important to remember that the majority of the proposed changes are only temporary.

Directors should not start taking their eye off the ball and become complacent. The measures set out in the draft bill do not modify the existing regime on directors' duties. When taking on new debt whether under the government schemes or otherwise or incurring other liabilities, directors should ensure that they meet their general duty to act in the way they consider, in good faith, to be most likely to benefit the company members as a whole. However, once the directors have formed a view that the company is insolvent (in this context, this means that its assets are exceeded by its liabilities), the duty is to act primarily in the interests of the company's creditors.

More importantly, directors should note that investigations and grounds for possible claims, set out below remain unchanged:

  • fraudulent trading
  • misfeasance or breach of fiduciary duty
  • transactions at an undervalue
  • preferences
  • personal guarantees
  • various fraud and misconduct related offences under the Insolvency Act.

Breaching these rules may give rise to potential grounds on which directors could face personal civil and criminal liability. Directors could also be made subject to a disqualification order or undertaking, or liable to pay compensation, under the Company Directors Disqualification Act 1986 (Directors Disqualification Act).

Practical steps directors should take

The practical steps directors should take are:

  1. Review the present financial position of the company and keep them under continual review.
  2. Hold frequent board meetings convened specifically for the purpose of reviewing the company's financial position and keep proper minutes of those meetings, noting in particular any decisions made and the reasons for them.
  3. Maintain accurate and up-to-date company financial records.
  4. Continually monitor the company's financial position and future cash flows and consider ways to reduce expenditure.
  5. Take professional advice aimed at reviewing whether insolvent liquidation is inevitable or whether there is some way of resolving or mitigating the company's financial difficulties.
  6. View resignation as a last resort. If it becomes unavoidable, you should minute any dissent with other directors at a full board meeting and set the reasons out again in a resignation letter to the whole board.
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