Extended: Protection for businesses against the threat of insolvency

With a new national lockdown having been imposed until 2 December 2020, many businesses may be concerned about how they are going to survive. However, some measures put in place by the government earlier this year to protect businesses against the threat of insolvency have now been extended.

Below we have summarised some of the main provisions set out in the Corporate Insolvency and Governance Act 2020 (“The CIG Act”).

Winding up Petitions

Creditors are not allowed to serve a statutory demand or issue a winding up petition where the reason why the debt has not been paid is related to Coronavirus.

If a creditor serves a statutory demand on a company in the period between 1 March and 31 December 2020 it will be void and unless a creditor has reasonable grounds for believing and establishing that Coronavirus has not had a financial impact on the debtor company, or that the debt would have been unpaid anyway, no winding up petition can be issued against that company based on an inability to pay debts.

If a creditor issues a winding up petition before 31 December 2020, a hearing will take place prior to advertisement of the petition at which time the court must decide whether or not Coronavirus is the reason why the debtor company cannot pay its debts.

However, directors should be aware that if their company was suffering financial problems prior to March 2020, there is still the risk of a winding up petition proceeding before the court.

The Statutory Moratorium

The CIG Act has extended the moratorium against creditor action to enable a company breathing space for a restructure or rescue to 30 December 2020.

Small Suppliers

The small-supplier exemption from the termination clause prohibition is extended to 30 March 2021. The termination clause provisions in the CIG Act prevent contractual terms that allow contracts to be terminated if a customer enters an insolvency procedure. To help support small business suppliers who are more likely to experience a detrimental impact from the effects of coronavirus, the CIG Act includes a temporary exclusion which excludes small suppliers from the scope of the termination clause measure. This provides certainty to small suppliers that they can continue to rely on contractual termination clauses where their customer has entered a formal insolvency procedure.

Whilst these extensions are all welcome Directors should note that the relaxation of the threat of personal liability for Directors who have allowed their companies to trade whilst insolvent has not been extended. The previous temporary measures meant Directors would not be held accountable for a company’s financial position worsening in the period between 1 March and 30 September 2020.