Corporate Insolvency and Governance Act 2020: impact on winding up petitions

The Corporate Insolvency and Governance Act 2020 became law on 26 June, bringing with it temporary and permanent changes to insolvency and restructuring law to support companies and businesses through the current pandemic and beyond.

A significant measure aimed at protecting companies from creditor action was the imposition of restrictions on the ability to pursue a winding up petition. So what are these restrictions and what do they mean for creditors and for companies in financial distress.

Impact for creditors

The above changes mean that during the pandemic period, creditors’ ability to pressure debtors for payment will be curtailed. It will remain possible to petition for a winding up but there will be a higher than normal burden in doing so and so increased risk of adverse costs being incurred.

It is worth bearing in mind that it is rare that a winding up petition is filed with the primary goal of triggering a winding up. Winding up is a collective remedy which benefits all creditors equally, but for the petitioning creditor the threat of a winding up petition can be a powerful tool to achieving a better outcome than other creditors, whether through accelerating payment or obtaining better security of payment. 

Now the main points of leverage in filing a winding up petition are removed. The debtor will not need to seek validation to keep trading and can obtain the protection of a moratorium without having to go to court. A court application may still be required to appoint administrators (if the winding up petition cannot first be disposed of for not satisfying the coronavirus condition) but while there is cost associated with such an application, it is unlikely to be significant enough to leverage a deal in most cases, especially where the lack of need for validation removes the burning platform.

As such, we would expect that for the present time there would be little incentive for creditors to pursue a winding up petition.

This does not mean that creditors will have no leverage but will mean that creditors may need to take a more creative approach to protecting their position, including considering what rights and influences they may have on a commercial or legal level to affect or influence any potential insolvency process.

Impact for debtors

In many ways the flagship measure of the Corporate Insolvency and Governance Act is the new restructuring moratorium. It is this (and perhaps the new restructuring plan) which have the potential to permanently change the way restructurings are approached and implemented. 

However, the fact that this arrives alongside the restrictions on winding up petitions suggests we might have a short wait to see this fully utilised. The moratorium is intended to give protection against creditor action, but presently the rights of creditors are severely curtailed and as such creditor action is less likely.

Conversely, the moratorium might have adverse cashflow impact for a company. Presently landlords might be kept at bay with less than full payment of rent. If a company entered a moratorium then rent would need to be paid in full as an expense. As such, a well advised company might conclude that it can achieve a better result for all stakeholders without seeking formal protection during the relevant period.