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Second suspension of rules relating to wrongful trading and other updates

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By Edward Williams

We published an article on 22 May 2020, detailing the effect of the Corporate Insolvency and Governance Bill which was designed to provide greater protection for businesses during the pandemic. 

The Bill came into force on 26 June 2020 and became the Corporate Insolvency and Governance Act 2020. We described the central aspects of the Act in our earlier article which can be summarised as follows:

  • A temporary suspension on winding up petitions against companies where they were based on statutory demands

  • A suspension of winding up petitions by creditors unless the creditor has reasonable grounds to believe:

    • Coronavirus has not had an effect on the company, or

    • The grounds on which the petition is based would have arisen regardless of coronavirus.

  • A relaxation of the rules relating to companies being able to apply to the Court for a moratorium from their creditors (A moratorium being a period where the creditors can take no further action against the company). It is intended that this measure will encourage negotiations and compromise between a company and its creditors or that it provides a company time to source additional funding.

  • A suspension of personal liability of directors for trading and failing to minimise their creditors' losses where they know or ought to know that their business is insolvent (known as ‘wrongful trading’). For more information on wrongful trading see TWM’s earlier article

  • Protection from termination of a contract in the supply of goods and services where one party becomes subject to relevant insolvency procedures, such as administration, liquidation or a voluntary arrangement. There are a number of exclusions under the Act, including in respect of small suppliers.

  • Greater flexibility to hold AGMs virtually.

Under the original legislation, the measures were due to expire on 30 September 2020. However, given the ongoing financial suffering for companies caused by COVID-19, the government has found it necessary to extend the relevant periods:

  • The suspension on the use of statutory demands and winding up petitions has been extended to 31 March 2021, following an initial extension to 30 December 2020.

  • The changes to the rules on companies being able to apply for a moratorium has likewise been extended to 30 March 2021.

  • The relaxation of the rules relating to AGMs has been extended to 31 March 2021.

  • The rules regarding wrongful trading have been extended to 30 April 2021.

The extension of these measures are a welcome move by the government, and will provide much needed relief for businesses. However, they also have the capacity to cause real difficulties for companies attempting to enforce their own rights under a contract or pursue debts owed to them.

As to whether these measures will be further extended, while there is clear hope that with the rolling out of a vaccine the world will begin to return to a sense of normality, the full economic ramifications of COVID-19 are of cause still yet to be felt, and so further extensions and/or amendments to this legislation remain a distinct possibility.

For further information or assistance, please contact David Hitchcock, Head of Dispute Resolution, david.hitchcock@twmsolicitors.com, or Jamie Berry, Head of Business Law, jamie.berry@twmsolicitors.com.

Click here to view more articles relating to the impact of COVID-19

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