Changes to insolvency law to help businesses during Covid-19

UPDATE: the Bill has now been enacted and came into force on 26 June 2020. The temporary measures mentioned below are due to expire on 30 September 2020. 

The highly anticipated Corporation Insolvency and Governance Bill has recently been published. The Bill introduces new restructuring tools and protection for companies undergoing the insolvency or restructuring process. It also includes temporary changes to insolvency law to provide businesses with much needed relief during this crisis.

In order to curb the economic impact of the pandemic, the Bill has been expedited through Parliament and is expected to come into force soon. 

This blog will break down the temporary changes that this Bill will soon bring about. For information on the permanent changes, read Insolvency.

Temporary suspension of the wrongful trading rules

The Bill will suspend wrongful trading provisions retrospectively for 3 months, from 1 March 2020 to 30 June 2020, or a month after the Bill comes into force. 

What is wrongful trading?

Wrongful trading is an offence committed by directors who behave negligently. They contributed to the company’s insolvency by allowing it to continue trading when they knew or ought to have known that the company is incapable of repaying its debts. 

If found guilty, directors would be personally liable for any debts incurred by the company as a result of their negligence. They would also be disqualified if their conduct was deemed unfit. 

Effect of the suspension

During this period, courts will assume that directors aren’t responsible for putting the company in a financially worse position. Notably, there’s no requirement for the worsened position to be caused by Coronavirus and it’s unclear whether this assumption can be rebutted.

Temporary restriction on statutory demands and winding-up petitions 

The Bill proposes that:

  • no winding-up petitions can be presented on or after 27 April 2020 on the basis that the company (debtor) has failed to respond to the creditor’s statutory demand issued between 1 March 2020 to 30 June 2020 (or a month after the Bill comes into force, whichever is later)
  • no winding-up petitions can be presented on or after 27 April 2020 until 30 June 2020 (or a month after the Bill comes into force, whichever is later) unless the creditor can demonstrate that Coronavirus didn’t affect the debtor financially and that the debtor would’ve been unable to repay even if Coronavirus didn’t impact its financial standing

What happens to statutory demands which have been served?

Any statutory demands served on or after 1 March 2020 until 30 June 2020 (or a month after the Bill is enforced) can’t be used as a ground to present a winding-up petition. 

Statutory demands served before 1 March 2020 remain unaffected. 

What evidence can creditors present to support their winding-up petition during this period?

Creditors must show that they believe that the debtor’s inability to repay its debt isn’t due to Coronavirus and that it would’ve failed to repay regardless.

To prove this, they can produce any evidence of late payments or unpaid invoices before the onset of Covid-19 ie before 1 March 2020. Previous annual accounts of the company may also be useful. 

What happens to the winding-up petitions that have already been served?

The retrospective effect of the Bill means any petitions issued on or after 27 April 2020 that failed to meet the two criteria will likely be dismissed by courts. 

To minimise the chances of dismissal, creditors can prepare evidence to demonstrate that the requirements have been met. 

Companies that received winding-up petitions can prepare evidence to show that their failure to repay is due to the financial impact of Coronavirus. Additionally, companies can now continue to deal with their assets between the presentation of the petition and the grant of the court order.

What happens to the winding-up orders that have already been made?

Any winding-up orders made on or after 27 April 2020 that didn’t satisfy the requirements set out (ie the company’s insolvency was caused by Coronavirus) in the Bill will be set aside.  

It’s likely that the responsibility to challenge a winding-up order lies with the liquidator. 

Final words

These temporary changes have been criticised by some creditors as being one-sided since its sole purpose is to protect debtors during this difficult period. As the Bill progresses through the Parliament, it will be interesting to see whether further changes will be made.

Chloe Lai