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CIGA - The biggest shake up of the insolvency regime in 20 years

Partner Ben Klinger and Solicitor Mark Allan discuss key advantages of the changes and major pitfalls to watch out for.

On 26 June, the Corporate Insolvency and Governance Act 2020 (CIGA) came into force, introducing both temporary and permanent changes to the UK corporate insolvency regime. It is the biggest shake-up of the framework in almost 20 years, which has undoubtedly brought a lot of business and legal benefits to companies.

In this article, we will discuss the key advantages of the changes and major pitfalls to watch out for. We will conclude with some practical advice for directors who should look to solicitors and insolvency practitioners during these uncertain times. But first, let us take a quick look at the introduced provisions.

Summary of temporary changes

  • Prohibition on presenting winding up petitions based on statutory demands between 1 March 2020 and 31 December 2020. This prohibition is absolute;
  • Restriction on presenting winding up petitions on grounds other than a statutory demand between 27 April 2020 and 31 December 2020 unless the ‘coronavirus test’ is satisfied, that is that the creditor must have reasonable grounds for believing that:
  1. coronavirus has not had a financial effect on the company, or
  2. the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company;
  • No winding up orders may be made by the court on a petition presented within the period 27 April 2020 to 31 December 2020, if it appears that coronavirus had a financial effect on the company before the presentation of the petition;
  • Suspension of liability for wrongful trading during the period 1 March 2020 to 30 September 2020 and reinstated 26 November 2020 until 30 April 2021. During the period the suspension has been and is in place, the court is to assume that directors are not responsible for any worsening of the financial position of the company or its creditors. The suspension does not apply to banks, insurance companies and the like;
  • Temporarily eased company filing requirements (from 27 June 2020); and
  • Temporarily eased requirements relating to meetings (including annual general meetings (AGMs)) initially for the period 26 March to 30 September 2020 and subsequently extended to 30 December 2020. If companies were required by their constitution to hold a general meeting by a specific date between 26 March and 30 September 2020, they were able to extend such deadline to 30 September. This change was not extended meaning AGMs due to be held after 30 September must be held within the time limits specified in the company’s articles or rules.

Extension of filing deadlines

In accordance with section 39 of CIGA, the Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020 came into force on 27 June 2020. Under these regulations:

  • For accounts and reports filing deadlines that fall between 27 June 2020 and the end of the day on 5 April 2021, the deadlines are extended by three months;
  • The current 14-day deadline to file confirmation statements is extended to 42 days;
  • The current 14-day deadline to file notices (e.g. changes to directors’ details) is extended to 42 days; and
  • The 21-day deadline for registering a charge against a company's assets increases to 31 days;

According to the Government: “The measures introduced by the regulations will relieve the burden on businesses during the coronavirus (COVID-19) outbreak and allow them to focus all their efforts on continuing to operate.” These extensions certainly provide businesses affected by the ongoing pandemic with “breathing space”. They allow focus on the survival of business instead of wasting time on meeting various filing deadlines.

Late filing of company accounts can lead to financial penalties of up to £1,500 for a private company and £7,500 for a public company. The penalty will double if a company files its accounts late in two successive financial years. Failure to file confirmation statements, annual returns or accounts is a criminal offence for which directors can be personally fined. If these documents are delivered late, the registrar may take steps to strike the company off the public record.

There are several consequences of failing to register charges against a company’s assets within the deadline, including the security potentially becoming void. Though this is bad for the security taker, the responsibility to file sits with the company and failure to ensure filing within the time limit may cause problems for it in future with the same or other lenders.

All the new extensions benefit businesses who would have struggled to meet the ‘pre-Covid’ deadlines, helping many to avoid legal penalties.

Extension of meeting deadlines

During the period of 26 March 2020 to 30 December 2020, companies may hold full or partial virtual meetings without any requirement for a physical location in respect of (1) general meetings (2) meetings of any class of members and (3) meetings of delegates appointed by members.

Notably, attending members do not have the right to:

  • attend the meeting in person,
  • participate in the meeting other than by voting, or
  • vote by particular means.

Since members are prevented from speaking, meetings can be kept brief, and businesses can focus on what is essential. However, there is less opportunity for member engagement. It is important that boards communicate well with its members, for example, suggesting alternative methods of engagement. Members used to a particular way of conducting meetings may become frustrated with the restrictions, so it is important that boards show understanding.

Finally, as meetings can take place virtually, the risk for companies to fall foul of the law reduces, which is an essential change to the law for business.

CIGA: Pitfalls to watch out for

On 1 October 2020, the suspension on wrongful trading was lifted, only for it to be reinstated 26 November 2020 until 30 April 2021. Now is a good time to reconsider what it is, particularly due to the uncertainty of how the courts will treat the period the suspension was lifted. It is odd that the Government did not reinstate the suspension retrospectively from 1 October. In our view, the court would likely take a sympathetic view to directors caught in this period and would not allow the lacuna to have a substantive effect. However, this uncertainty adds to the need to ensure that proper professional advice is taken in all circumstances.

Wrongful trading

Normally, directors owe duties to the company’s shareholders. However, once a director or an officer of a company concludes (or ought to have concluded) that their company is highly unlikely to avoid insolvent liquidation, they have a duty to take every step of a diligent person to minimise potential loss to the company’s creditors. If a director fails to comply with this duty, they may be held personally liable. A liquidator or administrator could thus apply to the court for an order requiring the director or officer to contribute to the company’s assets.

Directors must be very careful during this period of uncertainty to ensure that they are complying with the common law and statutory duties. For some directors, the suspension of liability for wrongful trading has given them the confidence to plough through, as was the intention of the Government. Sensible directors will have done so, whilst having regard to their duties and monitoring the status of their companies carefully throughout. Hopefully, many such businesses have succeeded. However, some, who have used the time when the wrongful trading provisions were suspended to act carelessly or even recklessly, may have placed themselves in a precarious position.

Directors’ Duties

Wrongful trading is only one of several provisions that directors should be wary of. Arguably, the biggest pitfall for directors is not being mindful of the fact that their duties have remained unchanged throughout the pandemic. This means that they have continued to face personal liability for:

  • Breach of general fiduciary duties (the Companies Act 2006 codified some of the duties directors owe to a company, for example, the duty to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole);
  • Fraudulent trading (Insolvency Act 1986);
  • Director disqualification (Directors Disqualification Act 1986); and
  • Misfeasance (Insolvency Act 1986).

Further, transactions that would normally be caught by the wrongful trading provisions during the suspension period may, in any event, be challenged as reviewable transactions, such as preference payments or transactions at an undervalue.

It is important that directors record minutes of all their decisions. This will prove useful should they become the subject of an office holder’s investigations. Proving that one has properly considered the relevant issues before deciding is useful evidence. Directors who are considering complicated matters or making potentially risky decisions (such as to pay dividends where there is a risk of insolvency in the near future) should seek professional advice beforehand. If those decisions are questioned in the future, the ability to produce advice relied upon at the time of the decision can be of great value. 

Practical advice for directors

  1. Take early professional advice. In these uncertain times, it is arguably more important than ever to consult a solicitor and an insolvency practitioner to mitigate the risks to your business.
  2. Maintain good records. It is important to prepare minutes of board meetings and to record the decisions and the reasons behind them. Maintaining accurate and up to date management accounts allows directors to see how the business is performing and can assist with taking decisive steps.
  3. Cash is king. Directors should regularly review the financial position of the company, particularly to track if it is underperforming.
  4. Consider the company’s creditors. This is especially important if the company is teetering on the edge of insolvency.

Whilst focusing solely on the survival of the business, it is easy to lose sight of other important considerations. This is understandable, but it is vital companies proactively monitor their position and the ever-changing economic landscape, seeking professional advice where appropriate.

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