Corporate Insolvency and Governance Bill

Explanatory Notes

Legal background

Insolvency framework measures: moratorium, termination clauses, arrangements and reconstructions for companies in financial difficulty (restructuring plan)

57 The current legislation relating to corporate insolvency is set out in the First Group of Parts of the Insolvency Act 1986, in particular –

Company voluntary arrangements (Part 1)

Administration (Part 2)

Winding up of registered companies (Part 4)

58 A company in financial difficulties can agree a voluntary arrangement with its creditors if the requisite proportion of creditors (75% calculated by value of debts) approve its proposals. The arrangement cannot affect the rights of a secured creditor or the rights of a preferential creditor to be paid in priority to other debts, in either case without their express consent.

59 In addition, Part 26 of the Companies Act 2006, which provides for schemes of arrangement, can be used to effect a company rescue. The new Part 26A restructuring plan regime has been largely modelled on Part 26 schemes. As the Companies Act 2006 provisions implicitly bind the Crown, any arrangement or reconstruction agreed and implemented under new Part 26A will also necessarily be binding on the Crown.

60 Section 233 Insolvency Act 1986 assists the insolvency office-holder in maintaining "essential" supplies– utilities, communications and IT supplies, by preventing the supplier of them demanding payment of outstanding charges as a condition of supply. The supplier may seek a personal guarantee from the office-holder.

61 Section 233A of the Insolvency Act 1986 prohibits termination of a contract by utility, communications and IT suppliers on the basis of an insolvency related term in their contract. The main objective is to help companies continue to trade through an insolvency process that aids the rescue of companies – company voluntary arrangements and administrations. Safeguards are provided in that suppliers can terminate the contract on certain conditions: where the office-holder consents, where the court grants permission on the grounds of hardship, where the office-holder has failed to provide a personal guarantee within 14 days of a request by the supplier or if post procedure supplies are not paid for within 28 days.

62 The existing restrictions on termination of contracts for essential supplies will be retained. The new section 233B of the Insolvency Act 1986 applies to contracts for the supply of all other types of goods and services (unless exempted).

63 The current company law and insolvency law frameworks offer a number of options for achieving a rescue of a financially distressed company as a going concern or the sale of the company’s business. While administration, found in Part II of the Insolvency Act 1986, can be used to effect a restructuring (where the affairs of the company are taken over by an administrator), debtor-in-possession models (where the directors remain in control of the company) such as the company voluntary arrangement under Part I of the Insolvency Act 1986 and the scheme of arrangement under Part 26 of the Companies Act 2006, are more likely to be used to effect a company rescue.

64 The current legislation relating to corporate insolvency in Northern Ireland is to be found in the Insolvency (Northern Ireland) Order 1989, which makes equivalent provision to the Insolvency Act 1986 (except for section 233A, which is discussed below).

Winding-up petitions

65 The moratorium on enforcement of forfeiture of leases for non-payment of commercial rent is provided in the Coronavirus Act 2020, section 82 (England and Wales) and section 83 (Northern Ireland). Provision for Scotland is made by paragraph 7 of Schedule 7 to the Coronavirus (Scotland) Act 2020.

66 Sections 122, 123, 124, 127 and 129 of the Insolvency Act 1986 ("IA 86"), and rules 7.3, 7.10 and 12.39 of the Insolvency (England and Wales) Rules 2016, and, in Scotland, the Insolvency (Scotland)(Receivership and Winding-up) Rules 2018 and Rules of Court, relate to the opening of winding-up proceedings against a company.

67 Sections 122 and 123 concern the grounds upon which a company may be wound-up, section 124 provides that winding-up is begun by a creditor presenting a petition to a court, and sections 127 and 129 are concerned with the making, (and consequences), of a winding-up order.

68 In particular, one of the grounds in section 122 IA 86 (section 122(1)(f)) is that the company is unable to pay its debts. One of the circumstances where a company is considered to be unable to pay its debts in section 123 (section 123(1)(a)) is if a company owes more than £750, a demand has been made in the correct form, and the sum remains unpaid after 3 weeks. Section 127 IA 86 provides that where a winding-up order is made then any disposal of property by the company after the winding-up petition was presented is void. Rule 7.10 requires that where a petition is presented then notice of that petition must be advertised in the London Gazette. Separate rules apply in Scotland, but advertisement of the petition is nevertheless still a requirement.

69 Sections 221 and 229 IA 86 make equivalent provisions for the purpose of unregistered companies.

70 Sections 74, 206, 207, 214A, 240, and 242-245 of the IA 86 provide for the reversal of certain transactions in the period leading up to the commencement of winding-up proceedings.

71 In Northern Ireland, the Insolvency (Northern Ireland) Order 1989 and the Insolvency Rules (Northern Ireland) 1991 make provision that is equivalent to the IA 1986 and the Insolvency Rules 2016.

Wrongful trading

72 The wrongful trading provisions are contained in sections 214 and 246ZB of the Insolvency Act 1986 for liquidation and administration respectively in Great Britain and Article 178 of the Insolvency (Northern Ireland) Order 1989 for liquidation in Northern Ireland. This measure applies when the court is considering whether a director should make a contribution to the assets of a company in liquidation or administration. It provides that the court will not take into account any worsening of the company or its creditors’ financial position during the period of suspension of liability.

Power to amend corporate insolvency or governance legislation

73 The power to extend the period of temporary changes made under this provision is exercised by regulations subject to the made affirmative procedure, and is similar to the power in section 90(2) of the Coronavirus Act 2020 which allows the extension of the temporary measures contained in that Act.

74 The legislation to which amendments may be made includes the corporate provisions of the Insolvency Act 1986, and the Insolvency (Northern Ireland) Order 1989, Part 26A of the Companies Act 2006 (which relates to company restructuring and is inserted by this Act), the Company Directors Disqualification Act 1986 and the Company Directors Disqualification (Northern Ireland) Order 2002, the Cross-Border Insolvency Regulations 2006, Regulation (EU) 2015/848 on insolvency proceedings (after the implementation period completion day), this Bill (once it becomes an Act), and any subordinate legislation made under any of those Acts.

Meetings and filings

75 The legal background for these measures is addressed in the policy background section.


Prepared 19th May 2020