Many law students will have heard of a key piece of legislation: the Insolvency Act 1986, which is the primary act setting out insolvency procedures and liability for wrongful and fraudulent trading. The procedures in the 1986 Act have been under review for some years, but in the space of just 6 short weeks, Parliament has now enacted several hundred more pages of legislation in the form of the Corporate Insolvency and Governance Act 2020, most of which came into force on 26 June 2020.

The 2020 Act will have a huge impact on insolvency law in the UK, and is certainly something law students will need to know about. It was introduced in response to Covid-19 - hence the need to pass it speedily. Its purpose is to provide businesses "with the flexibility and breathing space they need to continue trading" during the pandemic.

How will Parliament give businesses this breathing space?

The 2020 Act introduces some new provisions - some of which are permanent and some of which are temporary measures:

A standalone moratorium

A "moratorium" is a period during which creditors cannot enforce their debts - essentially a pause so that the business has time to get back to profitability. Under the 1986 Act, moratoriums accompany other procedures, such as when a company goes into Administration. Now, under the 2020 Act, a company can enter a standalone moratorium for 20 or more business days without going through a formal insolvency procedure.

New restructuring plans

There are already various formal insolvency procedures to rescue (or not!) a company. One of these is a "Scheme of Arrangement" - a statutory procedure which needs the majority of creditors in each class to agree to restructure their debts, along with court sanction. The new restructuring plan looks closest to this, but with a crucial difference borrowed from the US: the new plan can bind all classes of creditors, even if the threshold for agreement is not met, as long as the court sanctions it.

Banning termination clauses

Suppliers will often include clauses in their contracts that stipulate that the contract terminates if either party becomes insolvent. The 2020 Act prevents suppliers from terminating their agreements with a company on the basis that it proposes to enter a formal insolvency procedure.

Temporary ban on winding-up petitions

One key ground under which a creditor can petition the court to wind up a company is if the company has outstanding debts which it has not paid off after the creditor has sent a statutory demand. Now, any statutory demand which expires between 1 March and 30 September 2020 cannot be used as a ground to issue a winding-up petition.

Temporary assumption against liability for wrongful trading

Under section 214 of the 1986 Act, directors can be held liable for allowing their company to continue to trade if there was no reasonable prospect of the company avoiding insolvency. Now, the court must assume that any director whose company continues to trade between 1 March and 30 September 2020 is not responsible for the company's financial position worsening. This will make wrongful trading harder to prove and so give directors more comfort.

In short, the new 2020 Act is all about fostering a "rescue" culture in the UK so that struggling businesses can survive - and there are now more tools at their disposal to do just that.

You can also rest assured that at Law Answered we're making sure that our notes are completely up to date with the new law for the start of the academic year. Our latest editions of our guides, which are going to print very soon, will include reference to these new provisions - notably in our LPC Answered Core Guide and our LLB Answered Company Law Core Guide.