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Breathing Space

24 July 2020 by Peter Swabey

The Corporate Insolvency and Governance Act has made the biggest reforms to the UK’s insolvency framework for almost 20 years, as well as some significant changes to corporate governance law

On 26 June, the Corporate Insolvency and Governance Act received Royal Assent. It is a complex measure, not only making the biggest reforms to the UK’s insolvency framework for almost 20 years but also making some significant changes to corporate governance law to reflect the needs of companies and other organisations during the COVID-19 pandemic.

The main focus of the Act is the provisions around insolvency, and we do not have room to go through these in detail here. The intention is, in the words of the explanatory memorandum, to “introduce greater flexibility into the insolvency regime, allowing companies breathing space to explore options for rescue whilst supplies are protected, so they can have the maximum chance of survival; [and] to temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action”.

Principal elements of the Act include:
• Moratorium. The introduction of a moratorium allowing a company in financial distress a breathing space in which to explore its rescue and restructuring options free from creditor action, perhaps facilitating a rescue of the company.
• Arrangements and reconstructions for companies in financial difficulty – provisions which will allow struggling companies, or their creditors or members, to propose a new restructuring plan proposal between the company and creditors and members.
• Winding-up petitions – provisions to protect businesses from winding-up petitions by creditors in circumstances where COVID-19 has had a financial effect on the company which has caused the grounds for the proceedings.
• Wrongful trading – a measure to prevent a court taking into account losses incurred during the period in which businesses were suffering from the impact of the pandemic when assessing director liabilities.
• Termination clauses in supply contracts – the prohibition of termination clauses that engage on insolvency or are based on past breaches of contract, which will mean that (subject to certain exclusions) contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears (unless they can demonstrate that this will cause them financial hardship).

Some of these changes are time limited, but others make permanent changes to UK insolvency law and, as such, they were the subject of detailed discussion during their passage through parliament. A webinar on the insolvency aspects of the Act, which the Institute ran jointly with a number of accountancy and insolvency regulating bodies is available at: r3.org.uk/events-training/webinars/more/29479/page/1/.

Leaving aside the significant changes to insolvency regulation, the corporate governance changes constitute nothing less than a significant erosion – albeit temporary and very necessary – of shareholder rights enshrined in the articles of association. The principal changes can be found in Schedule 14, which relates to ‘meetings of companies and other bodies’.

Covering All Bases

The scope of the Act is wide – it covers companies, charitable incorporated organisations, registered co-operative societies, building societies and friendly societies (as defined in specific legislation) and applies to meetings held, or due to be held, between 26 March and 30 September 2020 with power for national authorities (the Secretary of State or relevant devolved bodies) to amend the period as necessary or to make additional regulations.

The legislation provides that:
• ‘The meeting need not be held at any particular place’ – which removes the need for a venue to be stated and so has the effect of removing any doubt about the legality of virtual meetings.
• ‘The meeting may be held, and any votes may be permitted to be cast, by electronic means or any other means’ which permits a wide range of options, including virtual meetings.
• ‘The meeting may be held without any number of those participating in the meeting being together at the same place’ which removes the requirement for a quorum meeting together.
• ‘A member...does not have a right – (a) to attend the meeting in person, (b) to participate in the meeting other than by voting, or (c) to vote by particular means’ which establishes that meetings can be held electronically and behind closed doors.
• ‘The provisions of any enactment relating to meetings’ and ‘The provisions of the constitution or rules of the qualifying body have effect subject to this paragraph’ which means that this Act overrides any conflicting provision in legislation, regulation or the organisation’s own constitution, including its articles of association.

Finally, the Act extends the period in which an AGM must be held until 30 September 2020, with power for the ‘national authority’ to extend this if necessary. These are clearly non-trivial changes, removing the right of members to attend an AGM (even though it would be illegal under the current restrictions on gatherings for them to do so) and overriding the terms of the articles of association, which back all those years ago when I was studying for my exams (the Companies Act 1985 thank you, not the 1948 Act!) was treated as the contract between a company and its members.

Further Changes

There are further changes in the Act around company filings, typically giving extended time limits for documents to be filed at Companies House and, importantly, extending the period allowed for the delivery of the annual report and accounts to Companies House to either 30 September 2020 or “the last day of the period of 12 months immediately following the end of the relevant accounting reference period”, whichever is the earlier. A webinar on the governance aspects of the Act, which the Institute ran jointly with a number of accountancy and insolvency regulating bodies is available at: icsa.org.uk/knowledge/webinars/corporate-insolvency-and-governance-act-2020.

The Institute, with the help of Slaughter and May, updated its guidance on shareholder meetings to reflect these changes and Shareholder meetings under the Corporate Insolvency and Governance Act 2020 was published on 9 July 2020. The new guidance has been drafted by a Working Party of the City of London Law Society Company Law Committee and the Chartered Governance Institute, with the support of GC100 – the Association of General Counsel and Company Secretaries working in FTSE 100 Companies, the Investment Association and the Quoted Companies Alliance. The Department for Business, Energy and Industrial Strategy and the FRC have both endorsed this guidance note, which covers a number of issues, including how companies can hold shareholder meetings under the Act and how they can balance the rights of members against the need to comply with lockdown requirements.

On 4 July, the Health Protection (Coronavirus, Restrictions) (No.2) (England) Regulations 2020, (the Regulations) took effect and increased the number of people that can meet for a physical meeting. Companies with an AGM before 30 September are protected by the Act, but the Regulations create concern for a number of companies due to hold their AGM after that date and who are currently developing their documentation in order to give appropriate notice. Although the Regulations require conference venues to remain closed, many other business premises may now be opened and it is conceivable that the situation will have changed further by the end of September. In this case, as the law stands, it might be necessary for companies to hold a physical AGM, albeit that they must be held in accordance with the then current government guidance on social distancing at a venue which is not required to remain closed. There are at least six FTSE 100 companies which fall into this position and I am sure that there will be many more outside the FTSE 100. I have therefore written, with the support of a number of other organisations, to the Department for Business, Energy and Industrial Strategy asking them to extend the provisions of Schedule 4 of the Act until the end of the year, and to do so as soon as possible given the planning timeline for the average AGM and the fact that a number of firms have reported that they are already advising clients on meetings in Q4. This will give the affected companies, and their shareholders, greater certainty.

One message that came through very clearly in our webinar with Sacha Sadan, Director of Investment Stewardship at Legal & General Investment Management, on 29 June was that, although investors believe that investee companies should put their stakeholders first during the COVID-19 crisis, they are watching keenly to see how companies behave. And behaviours will have consequences. Investors will support companies during this difficult time, but also hold them to account. Issues such as tax transparency, capital management, diversity, over boarding, data security and climate change will remain important, and companies will, rightly, be judged on how they respond to the conflicting challenges facing them. Good governance and sustainability will be the building blocks of a better future.

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