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Government announces extension of temporary insolvency measures

01 Oct 2020

The Government has announced the extension of certain of the temporary measures introduced earlier this year in the Corporate Insolvency and Governance Act 2020 (CIGA 20) which were otherwise due to expire on 30 September 2020.

The measures being extended are:

  • A restriction on the use of statutory demands and winding-up petitions (extended until 31 December 2020)
  • A small-supplier exemption from the scope of the prohibition on termination clauses in supply contracts (extended until 31 March 2021)
  • Temporary modifications to the operation of the company moratorium procedure (extended until 31 March 2021)

The reason for these extensions is to continue to provide breathing space to companies whilst coronavirus related restrictions remain in place (including social distancing and regional lockdowns). This extension ensures that the measures remain available to companies that may be in financial difficulties during this difficult and unprecedented time and whilst the Government’s plans are to wind down the package of financial support. The duration of the extension for each measure has been determined having regard to the nature of the measure in question.

The extended restrictions placed on the use of statutory demands and winding-up petitions to 31 December 2020, whilst helping to protect companies from aggressive creditor action during the period when companies are continuing to be financially impacted by coronavirus, means that creditors cannot rely on statutory demands to bring winding-up petitions, and are prohibited from filing winding-up petitions where the company’s inability to pay is due to coronavirus.

These restrictions are controversial and have been criticised as being too blunt an instrument to distinguish debtors who “won’t pay” from those who “can’t pay”, with the consequence that the number of company insolvencies is currently 43% lower than at the same (pre-COVID) same time last year. The concern is that – when these restrictions are eventually ended – there will be a surge of insolvencies from companies that will no longer be protected from enforcement action from their creditors.

Coronavirus

It is noteworthy that the temporary relaxation of the wrongful trading provisions under section 214 of the Insolvency Act 1986 has not been extended beyond 30 September 2020. Directors will therefore need to consider whether continued trading can be justified (taking into account the revisions made by the Government to its business support initiatives, such as the just announced Jobs Support Scheme to replace the Coronavirus Job Retention Scheme) and, if not, to take appropriate steps to minimise the potential loss to creditors if they are to avoid the risk of being held personally liable for the losses arising.

Directors who are concerned about what these changes mean for their business, as well as the potential risks to their personal position, should seek advice from an experienced and regulated insolvency professional as to the options available to them. Whilst the extension to 31 December 2020 provides a continued measure of protection during the latest resurge of COVID-19, directors should use the current (temporary) breathing space wisely so that they can plan to survive (and even thrive) when these measures are fully withdrawn.

Creditors who are concerned about these continued restrictions on their enforcement rights, as well as the effect on them of the prohibition on termination clauses in supply contracts (which is a permanent change to the law introduced by CIGA 20) should likewise seek advice from an experienced and regulated insolvency professional as to the options available to them to mitigate the effect of these measures.

For further information please contact neil.harrold@hay-kilner.co.uk