Corporate Insolvency and Governance Act 2020: What a Relief…!

On 25 June 2020, the Corporate Insolvency and Governance Act 2020 (CIGA 2020) came into force. The purpose behind this legislation was to protect businesses and provide relief in the wake of the COVID-19 pandemic.

CIGA 2020 itself then triggered the publication of further regulations, including the Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020, which formalised the temporary extension of certain time periods for making filings with Companies House, where the original deadline falls between 27 June 2020 and 5 April 2021. In particular:

• The time period for filing accounts was extended by 3 months;
• The 14 day period for filing annual confirmation statements and other event-driven notices was extended to 42 days; and
• The 21 day period for registering a charge was extended to 31 days.

For filings due before 27 June 2020, extensions for filing accounts were otherwise permitted subject to an application being made to Companies House.

CIGA 2020 also brings in temporary relief from wrongful trading by directors.  Ordinarily, negligent (rather than fraudulent or dishonest) mismanagement of a business could leave the director in question open to an action for wrongful trading under the Insolvency Act 1986. The effect of CIGA 2020 is to suspend the wrongful trading provisions during the period 1 March 2020 to 30 September 2020, to prevent directors being held personally responsible for their companies’ worsening financial problems during this period.  Instead, the COVID-19 pandemic is deemed to be the cause of any such financial decline, and the suspension means that directors can continue to trade their companies despite being in potentially serious financial trouble (when they might otherwise have had to cease trading to minimise creditors’ losses and avoid breaching their directors’ duties), to help rescue otherwise viable companies.  

If a company does become insolvent, one consequence may be that counterparties to contracts can use that insolvency as grounds to terminate their contract. This is a common clause in commercial contracts which suppliers rely on to limit their exposure to the counterparty’s insolvency. However, owing to the negative effect of such action on the insolvent party, this can restrict its ability to trade, find a buyer or secure further funding. CIGA 2020 therefore imposes a ban on suppliers from exercising such termination clauses where the counterparty enters into a formal insolvency procedure on or after 26 June 2020.

Importantly, however, there is a temporary exception to this ban for suppliers who fall within the scope of ‘small companies’ if their customer enters into an insolvency procedure between 26 June and 30 September 2020 (although this date may be subject to future change). This gives smaller suppliers time adjust to the ban as well as the opportunity to exercise their rights before the ban also applies to them from 1 October. This ban does not affect any other rights of termination in the contract.

If you have any questions about CIGA 2020 and the effect it may have on your business, please contact our Head of Corporate, Liz Barton.