UK Corporate Insolvency and Governance Act: COVID-19 measures extended. What does this mean for companies and directors?
On 26 March 2021, the Government passed the CIGA 2020 (Coronavirus) (Extensions of Relevant Period) Regulations 2021 (Regulations), extending some of the temporary relief measures under the Corporate Insolvency and Governance Act 2020 (CIGA 2020) until 30 June 2021.
The Regulations bring further relief to companies, directors, and businesses, who would otherwise have faced a tsunami of winding up petitions, action for wrongful trading and re-commencement of insolvency procedures after 31 March 2020. Applicable across the whole of the UK, these Regulations aim to provide additional support to the cash strapped businesses on the brink of being declared insolvent. The Government has declared this extension in a bid to give a definitive boost to the economy, as it slowly grapples to recover from the serious fiscal damage caused by the Covid-19 pandemic.
What is the effect of the Regulation?
Winding Up Petitions
By way of background, initially CIGA 2020 imposed blanket restriction on presenting winding up petitions based on statutory demands served on or after March 2020. This was extended until 31 March 2021 on 8 December 2020, when the Government extended the relevant period under CIGA.
Broadly, in pre-COVID-19 era, if the creditor served a written demand for payment of a debt of more than £750 (statutory demand) and even after three weeks of its service, the company was unable to comply with the said demand, the creditor could commence a winding up petition against the company.
CIGA 2020 put restrictions put on creditors from presenting winding up petition on the grounds of a company’s inability to deal with its statutory demands. The restrictions, now extended till 30 June 2021 mean that a winding up petition will only be permitted if the creditors can prove they have:
- reasonable grounds for believing that coronavirus has not had a financial effect on the company or
- that the debt issues would have arisen anyway, regardless of the impact of the pandemic.
This is known as the Coronavirus Test.
In other words, until 30 June 2021, no winding up petition can be presented before court, unless the creditor can demonstrate that the petition satisfies the Coronavirus Test.
What the Regulations mean for the financial sector?
Every coin has two sides, and the CIGA relief measures also have divergent effects on the financial sector. The creditors no doubt view this as curtailment of their legitimate and lawful right to take action to secure their debt. At the opposite spectrum, the businesses and companies view the CIGA measures as a relief from the aggression of the creditors, a genuine silver lining in such uncertain times.
The Regulations have also extended the temporary suspension of wrongful trading liability a second time from its original suspension of the ‘relevant period’ from 26th November 2020 till 30th June 2021. The suspensions are not universally applicable, as certain entities such as insurance companies, banks and certain other financial institutions are excluded from its implications.
What is the Wrongful Trading regime?
Directors are obligated to be fully aware of their duties to the company and if insolvency threatens, their duty to the creditors. Under Section 214 and Section 246ZB of the Insolvency Act 1986, all directors, including shadow directors, may be held personally liable for the debts of the company, if it is proved that they failed to take every step to mitigate the potential losses to the company’s creditors.
The actions of those directors are judged against the benchmark of the actions of a reasonable diligent person, placed in similar position, while exercising reasonable care and skill. If a director knows or ought to have known that insolvency is inevitable, and still continues to trade, such director is held personally liable to contribute to the deficit in the assets of the company, which is then subsequently liquidated. Ratification of the director’s actions by the shareholders is generally not possible once the company has become insolvent. The only defence available to the director in such circumstance is to prove that the director took every step to minimise the losses to the company and its creditors during this period of wrongful trading.
What the Regulations mean for the directors?
Under Section 12, CIGA 2020, in determining the director’s liability to contribute to the company’s assets (for wrongful trading), the court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors, that occurs during the relevant period. The relevant period was first extended from 1 March 2020 till 30 September and then from 26 November 2020 to 30 April 2021. The Regulation has now extended the relevant period till 30 June 2021.
In simple terms this means that directors will now not be held personally liable, if the company becomes insolvent in the time from 26 November 2020 till 30 June 2021, on the assumption that they worsened the financial position of the company. It is important to note that nowhere under CIGA 2020 or the Regulation, is there a requirement to show that Coronavirus was a major contributor to the worsening of the company’s financial health. Also, important to note, these temporary changes to the wrongful trading liability do not absolve the directors completely from their personal liability. The court, in extreme cases could still hold a director responsible, especially in cases where the director acted recklessly and clearly did cause the worsening of the company’s financial position. Also remember that provisions of CIGA 2020 (and by extension this Regulation), do not modify directors’ disqualification regime under the Company Directors Disqualification Act 1986.
The practical implication of such extension of relevant period is that a breathing space has been created for directors of those companies which are facing imminent insolvency. These temporary reliefs give a sense of artificial security. It is critical for directors to accept the reality that the company may likely be carrying additional debt and thus be unable to regain its financial health in the short term.
Concerns about how the Regulation may affect you
Nebulous statements from the Government, coupled with news of shortage of vaccines and a possible third wave, have all contributed to the current economic despondency. In such circumstances, it is usually the Government’s endeavour to prioritise rescuing small and vulnerable businesses, which would most likely have gone under, but for the Government’s safety net.
If you are concerned about impending financial loss and its impact on your company’s fiscal health, or your liability as a director, it is advisable to seek professional advice now, as it may be too late to find viable solutions for your business after the eventual expiry of these temporary relief measures.
Speak to our specialist corporate restructuring and insolvency lawyers today
If you would like advice on winding up petitions, or your obligations as a company director or insolvency in general, please speak to our Corporate Restructuring and Insolvency Specialist lawyers. You can contact the team at firstname.lastname@example.org .
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