Major changes to insolvency law

As businesses begin to re-open across the UK and the economy starts to recover from the impact of COVID-19, preliminary indications suggest UK business insolvencies could increase by 20-30%¹

In response, the Government has introduced substantial changes to the Corporate Insolvency and Governance Act 2020 (CI&GA), which came into effect on 26 June 2020². The act introduces new corporate restructuring tools and temporary easements to give distressed businesses the breathing space they need to get advice and seek a rescue following the coronavirus pandemic.

The Government's full statement can be read here. We have highlighted below some of the keys changes albeit this list is not exhaustive. It's important for you to become at least familiar with these changes highlighted and seek further guidance relating to any issues and concerns you may have.

Temporary measures

• Extensions to the deadlines for companies to file their annual returns at Companies House.
• The temporary suspension of creditor’s ability to issue winding-up petitions on statutory demands issued between 01 March and 30 September 2020 (please refer to the CI&GA for further details).
• The temporary suspension of liability for Wrongful Trading for directors and officers of insolvent companies until 30 September 2020.

Permanent measures

• A Moratorium - this will provide a company with temporary protection from its creditors and will be obtained with the assistance of an insolvency practitioner
• Arrangement and Reconstruction of Companies in Financial Difficulty- companies can propose to its creditors a compromise arrangement and/or restructuring plan to resolve, mitigate or prevent financial difficulties.
• Protection of goods and supplies - This restricts a suppliers’ ability to stop supplies and terminate their contract, as the result of the subject company: entering into a moratorium/restructuring arrangement; being in Moratorium and/or declared Insolvent. The measure also prevents suppliers from imposing any conditions concerning settlement of pre-existing debts, or other contractual changes.

Impact on credit insurance coverage

Credit insurance policies have traditionally required that insureds stop making shipments or providing services to financially distressed or insolvent customers without the Insurer's expressed consent. Nonetheless, the above changes mean that suppliers may be required to maintain supplies. In such cases we would expect that Insurers will offer this protection in the event payments are not made as prescribed but it’s important you check with your insurer first.

How should payments be treated?

• If cover is provided by the insurer it is reasonable to expect that the payment be considered as salvage. As such, they will be allocated against the original debt. In this situation the Insurer may feel obliged to waive their rights to salvage as the Insured is complying with the legal requirements.
• Insurers can choose to decline to cover these supplies. If so, then it can be argued these payments should not be considered as salvage.
• Consequently, companies who credit insure should approach each case individually and review their policy to understand what cover exists.

Recommendations

• Insurers have confirmed they are currently reviewing this legislation and will seek to provide further guidance to policyholders in due course. However, it is evident differing views are being taken and thus it is important if you are insured that you review each event on a case-by-case basis.
• Consult your legal advisors on the Corporate Insolvency and Governance Act 2020 itself and also specifically your Terms and Conditions of Sale.

The Corporate Insolvency and Governance Act 2020 is a relatively new piece of legislation. Companies, Legal Advisors, Insolvency Practitioners and Credit Insurers are all still getting to grips with it. Some of the measures materially change the current insolvency laws and practice. It is important you understand these changes and how they may impact your business.

Temporary measures to the Corporate Insolvency and Governance Act 2020 are due to be reviewed in September 2020, but it is likely they will be extended for a further period of time.

Sources:

1. https://www.eulerhermes.com/en_global/news-insights/news/the-insolvency-time-bomb--prepare-for-a-record-high-increase-in-.html
2. https://www.gov.uk/government/publications/corporate-insolvency-and-governance-act-2020

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as 10/08/2020, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.