Looking Forward – Corporate Insolvency “Heads Up”

The Corporate Insolvency and Governance Bill 2019-2021 and its potential effect on Winding Up Petitions

In this piece, Associate Solicitor Krystene Bousfield looks at how recent changes to the Corporate Insolvency regime may be worth considering by travel & leisure businesses, especially in these difficult times…

The Corporate Insolvency and Governance Bill 2019-2021 had its first reading in the House of Commons on Wednesday 20^th May (without debate).

MPs are due to consider all stages of the Bill at its second reading on Wednesday 3^rd June 2020.

So what is this Bill and what does it mean?

There is no denying that the UK economy has taken a huge hit in light of COVID-19 and that many companies, in various industries, are struggling financially as a result. The Corporate Insolvency and Governance Bill makes provision about companies and other entities in financial difficulty; and, if passed into law, will make temporary changes to the law relating to their governance and regulation.

The Bill, if passed into law, would enable an eligible company, in certain circumstances, to obtain a moratorium, giving it various protections from creditors.

What is a “moratorium”?

The standard definition of a ‘moratorium’ is ‘a temporary prohibition of an activity, often in response to temporary financial hardships’.

The Bill itself does not provide a specific explanation but goes into great detail as to the effects that one will have. Some of the main effects, and perhaps those most relevant to the travel industry, include:

• No legal process can be commenced or continued against the company or its property, save for employment-related proceedings or where the Court gives permission;
• Winding-up petitions cannot be presented, the company cannot be put into voluntary or compulsory liquidation, and administrators and administrative receivers cannot be appointed;
• There are restrictions upon winding-up or administration proceedings by the directors in respect of the company, the granting of security over the company’s property, the payment of certain pre-moratorium debts, and the disposal of the company’s property and hire-purchase property.

So, what makes a company ‘eligible’ as required by the Bill?

Schedule ZA1 of the Bill sets out provisions for determining whether a company is ‘eligible’ however in summary,  a company is “eligible” provided that it is not a certain type of company (e.g. an insurance company or an investment firm) and/or is not currently or has not in the last 12 months been subject to a moratorium or an insolvency procedure.

Statutory Demands and Winding Up proceedings

Something we have seen a lot of in recent times is travel companies being served with statutory demands, demanding payment of ‘outstanding debts’ (e.g. holiday refunds) within 21 days, failing which a Winding Up petition will be issued.

In addition to enabling companies to apply for a moratorium, The Corporate Insolvency and Governance Bill 2019-2021, if passed, will introduce a prohibition on presenting petitions in the period between 27 April 2020 and 30 June 2020.

The prohibition will apply in the following circumstances:

1. Where the creditor relies upon non-payment of a statutory demand served in the period between 1 March 2020 and 30 June 2020;
2. Where the petitioner relies upon the grounds in section 123(1)(a) to (e) of the Insolvency Act 1986, unless the petitioner has reasonable grounds for believing that COVID-19 has not had a financial effect on the company, or the facts relied upon as founding the petition would have arisen regardless (“the COVID-19 condition”); and

• Where the petitioner relies upon the ground that the company is unable to pay its debts as they fall due, unless the COVID-19 condition applies.

If the petitioner considers that the COVID-19 condition is met, the winding-up petition must contain a statement to that effect.

Regarding winding-up petitions presented on or after 27 April 2020 (but before the coming into force of this legislation), if the COVID-19 condition is not met, the Court may make an order to restore the position to what it would have been if the petition had not been presented.

Any winding-up order made after 27 April 2020 on the ground that the company is unable to pay its debts is void if the Court could not have made the order had this legislation been in force.

Statutory Demands and the threat of Winding-Up proceedings are often used by creditors for the wrong reasons, and can normally be disputed on this basis. However the Corporate Insolvency and Governance Bill, if passed into law,  will be welcome relief for companies who have been on the receiving end of such threats, provided they can prove that COVID-19 has had a financial effect on their company.

How will this affect travel companies?

Right now, it doesn’t, as the Bill is still in its very early stages and has a number of further processes to move through before being passed into law. If the Bill is passed into law, companies that find themselves struggling in light of COVID-19 may well be saved from administration provided they can prove that the only reason they find themselves unable to pay their debts in as a direct result of the pandemic.

For more info & to discuss further please contact Krystene or Head of Corporate Governance & Corporate, Emma Shakespeare.

This article was originally published on: 27 May 2020