Proposed legislation would reduce the risk of personal liability for business directors hit by the pandemic

The government has published the draft Corporate Insolvency and Governance Act 2020 which, if it becomes law, will give coronavirus-hit businesses and directors more protection from creditors.

Under the Act, companies would be able to apply for a moratorium, a legal authorisation to postpone payment to debtors, giving them time to rescue or strengthen their business without creditors’ intervention. The moratorium would be for an initial period of protection of four weeks.

The legislation would also create an assumption that directors are not personally liable for any worsening of their firm’s financial position between 1 March 2020 and 30 June 2020 or (if later) one month after the Act comes into force.

The Bill was introduced to the House of Commons on 20 May and follows up on Alok Sharma’s announcement in April about a proposed suspension of the wrongful trading regime. The suspension does not apply to some companies, particularly banks and others involved in financial services.

The proposed legislation also contains changes relating to termination clauses in supply contracts and to meetings and filings for companies.

Essential features of the moratorium

The directors of an eligible company that cannot, or is unlikely to be able to, pay its debts as and when they fall due can apply for the moratorium. A monitor must be satisfied that the procedure will enable the company to be rescued as a going concern or, if it is subject to a winding up petition, that it will result in a better outcome for creditors.

Certain companies are ineligible, including banks and other companies involved in financial services and also public – private partnership projects.

The moratorium will be for an initial period of 20 business days, which can be extended in certain circumstances

During the moratorium

During the moratorium there are restrictions on the enforcement or payment of pre-moratorium debts, except for:

  • Goods or services supplied during the moratorium
  • Rent in respect of a period during the moratorium
  • Wages
  • Redundancy payments
  • Debts under a contract concerning financial services

Other requirements include publication of the moratorium in the company’s premises and website and business documents.

The company may not obtain credit of more than £500 without informing the creditor of the moratorium and there are restrictions on the disposal of property.

During the moratorium:
  • No winding up petition can be presented by creditors
  • No winding up resolution may be passed unless recommended by directors
  • No administrator may be appointed save on the application of the directors and no administrative receiver can be appointed
  • Floating charges cannot generally be crystallised
  • Landlords may not forfeit the lease by peaceable re-entry without court consent
  • There are very limited rights to enforce security over the company’s property or to bring legal proceedings

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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