The Corporate Insolvency and Governance Bill: key provisions for the leisure sector - Kuits Solicitors Manchester
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The Corporate Insolvency and Governance Bill: key provisions for the leisure sector

The Corporate Insolvency and Governance Bill: key provisions for the leisure sector

11th June 2020 - Published by Kuits insolvency team

What is the Corporate Insolvency and Governance Bill (the bill)?

The bill sets out a number of important provisions relevant for all business sectors. Some of the key provisions may be of use to companies operating in the leisure sector, as they seek to adapt to the changing environment caused by COVID-19. This bill is expected to be passed in largely its current form in late June 2020.

What are the changes?

The most important short term change is the limitation in use of winding up petitions by creditors chasing sums they are owed. It was initially envisaged to only relate to landlords chasing tenants for rent, but it applies to all creditors seeking payment of any debt. Creditors will not be able to issue petitions on the basis of a statutory demand served between 1 March 2020 and “the relevant date” (being the day 1 month after the Bill comes into force), or generally between 27 April 2020 and the relevant date unless the creditor believes either:

a. COVID-19 has not had a financial effect on the debtor; or
b. the relevant ground would apply even if COVID-19 had not had a financial effect on the company.

Prior to the possibility of advertisement in the London Gazette (which is often the fatal step against debtors in the winding up process, as banks freeze trading accounts), the court will determine whether the creditor’s belief is justified. This is all expected to make it harder and more expensive for creditors to wind corporate debtors up. There is provision for this “relevant date” to be extended well into 2021 if necessary.

What does this mean for the leisure sector?

In the leisure sector, where footfall has been reduced to near zero by social distancing requirements and lockdown, a creditor would be very unlikely to demonstrate point a above, even if point b above may be demonstrable in some narrow circumstances.

The provision seeking to suspend director’s liability for wrongful trading is attempting to give directors comfort by continuing to trade without risking personal liability. This is the correct approach, but we must caution that potential liabilities for fraudulent trading, misfeasance, unlawful dividends and the risk of having made preference payments (putting certain creditors in a better position than other creditors of the company pre-insolvency) has not subsided.

In terms of permanent changes to be introduced, companies will be able to seek a moratorium to formulate a rescue plan to save the company. This will give companies a “payment holiday” in respect of many debts due from it for up to 12 months to enable the plan to be formulated, and (crucially) the existing management retains control. This may be of use in the leisure sector whilst the trading model is amended to make the company viable going forward, but it will not ultimately remove any liabilities (unlike, for example, a CVA). Linked to this will be provisions preventing suppliers from terminating supply contracts due to insolvency of the customer.

Final thoughts

It remains to be seen how the moratorium will work in practice, but in principle it is a positive step for operators in the leisure sector who may need to formulate a new structure and funding basis, provided such is foreseeable at the start of the moratorium and an insolvency practitioner (who would fulfil the role as monitor) agrees with the principle of a rescue plan.

If you would like advice from a specialist insolvency practitioner, please contact Richard Palmer on 0161 503 2996 or email richardpalmer@kuits.com

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