If you were asked to summarise the new Insolvency Law in one single phrase you would possibly come up with something like ‘we are all in this together’ or ‘you will never walk alone’. The new Corporate Governance Insolvency Act 2020 is a remarkable exercise in pinpointing interdependencies, shared responsibilities, flexibilities and elasticities. Will it work for everyone – and would this be the desired outcome, anyway? Increasingly, economic regulatory intervention is expected to work for all of us and helps to move us beyond the crisis of which Covid-19 might only feign to be the fulcrum.
I. Evolution of UK insolvency laws
When starting the drafting process, the UK Government was very much aware of the possibility of an economic recession. The latter ought not to be attributed to the UK’s exit from the EU, as much public debate has suggested. Instead, perspectives of a looming economic downturn pointed to the need for wider-reaching reforms that would tackle a plurality of phenomenon shaking previously comfortable economic grounds: migration, climate change, new technologies and AI, an aging population, just to recall a few headlines from the years antedating Covid – 19. In the 4th quarter of 2019 underlying company insolvencies increased to their highest annual levels since 2013, and total insolvencies were higher compared with the same quarter of 2018, according to the Insolvency Service’s statistics.
Though, the UK has always been inventive in responding to business needs through its insolvency laws. Under the Enterprise Act 2003 administrative receivership conferring control to a single secured creditor was replaced by a collective insolvency procedure: administration. The EA 2000 also introduced the three-stages statutory purpose of administration, the first stage of which full-heartedly aims for the rescue of the company as going concern. Insolvency work increasingly includes international and transboundary aspects which is addressed in the Cross – Border Insolvency Regulations 2006, the latter giving effect to the UNCITRAL Model Law for Cross-Border Insolvency 1987. Despite the availability of a 2018 UNICITRAL Model Law on the Regime and Enforcement of Insolvency-Related Judgements, legal advice from local lawyers, familiar with domestic jurisdictions, will remain indispensable.
II. Characteristics of the new Corporate Governance and Insolvency Act 2020 c. 12
Interdependencies?
The new Act sets out new terms and conditions for business relationships in amendments to the Insolvency Act 1986: suppliers of goods and services to a company that is subjected to insolvency proceedings may no longer terminate their contracts on this ground, unless the insolvent company consents to the termination. Small suppliers are exempt from the provisions. During the relevant period between 27 April and 30 September 2020 a creditor is only allowed to bring a winding – up petition if coronavirus had no financial effect on the company’s situation. The courts can set aside an order based on an unlawful winding-up petition and restore the position to what it would have been if the petition had not been presented.
Shared responsibilities!
The free-standing new moratorium introduced in Part 1 of the Act allows insolvency practitioners (IPs) to act as monitors alongside the company directors, who will remain in charge of running the business as ‘debtors-in-possession’, freed from their liabilities under the IA 1986’s ‘wrongful trading’ provisions. A new restructuring plan builds on a “cross-class cram down” feature that is binding dissenting classes of creditors or members. And, as with previous Part 26 schemes under the IA 1986, the court will always have absolute discretion over whether to sanction a restructuring plan if they do not consider it to be just and equitable.
Elasticities?
Though not necessarily advancing the cause of geographical boundlessness (just to the contrary: the new Act is largely a devolved instrument), this legislation takes a new approach to the dimension of time: It unifies temporary, permanent and even retrospective measures in one instrument and stands for a mix of ‘back to the future’ and anticipation. The Crown preference in respect of some taxes will be re-introduced and effectuate that HMRC enjoys an elevated priority position in corporate insolvencies. The temporary extension of time in which companies have to file accounts and reports with Companies House will come as a release to businesses, together with the temporary measure that permits virtual AGMs and general meetings. These and some more of the temporary measures, i.e. statutory demand, winding – up petitions, and the suspension of director’s liabilities for wrongful trading, may take retrospective effect for the period between 1 March to 30 June 2020, subject to extension or curtailment by regulation.
Nothing is yet set in stone: Under s.20 of the Act the Secretary of State has sweeping powers to modify or amend its effect regarding eligibility criteria, liabilities and processes. However, these powers will expire in March 2021. In addition, any measure taking under the section must only have effect for a period not exceeding six months.
Flexibility…
Remarkably, the new Act has already been applied in three court decisions prior to its enactment. On 2 June 2020 the High Court in Re A Company granted an injunction restraining the advertisement of a winding – up petition to a retail company who, closing its premises in line with government instructions on COVID-19, failed to pay rent and service charge for a lease. The court applied Hill v CA Parsons (1972) and Sparks v Harland (1997), both ruling that for court decisions on granting relief, in particular if they invoke the court’s controlling or managing functions, the likelihood of changes in the relevant law can be taken into account. In a previous judgement from May 2020, Travelodge Hotel Ltd v Aesthetics Ltd, the court held that in suitable cases it can take into account imminent changes in the law. Catching the spirit of the pending Bill, the court in this case also held that the winding – up petition would be averse to the interest of the class of creditors as a whole as its purpose was to seek payment from the company ahead of other creditors.
III. Corresponding economic policies
By no coincidence the Act has been adopted just days before the Prime Ministers’ speech on the revitalisation of the economy on the 30th of June. While the most obvious beneficiary is the construction industry (i.e. 1,5bn for hospital maintenance and building, £1.2bn for new affordable homes, over £1bn for new school buildings) there is a new appreciation of the human factor: planning laws will be amended to allow the speedy conversion of commercial buildings into residential homes, and planning processes will be cut to allow for the demolishing and rebuilding of vacant residential and commercial buildings as homes. It will be for the legal profession to consolidate such reformative force with regulative measures eked out by experiences of the Grenfell disaster, climate change and environmental degradation. It has also been recognised that new buildings do not necessarily conjure the workforce that turns them into liveable oases for human revitalisation and progress and who look after the most vulnerable in our society: young children and the elderly.
IV. In conclusion
While the law represents only one side of a coin, a look at the new Corporate Governance and Insolvency Act 2020 provides a fascinating inventory of our current state of affairs. It aims for breathing space, seeks a return to both stability and flexibility and – in a remarkable way – is bendable in correlation to a searching and changing society.