Corporate Insolvency and Governance Act 2020 and Charity related matters

This Act has received the Royal Assent on 25 June 2020 having been approved by parliament.  It has three main objectives in light of the impact of the COVID 19 epidemic and the consequential social distancing and reduced resources available to businesses:

• 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;
• 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; and
• to provide companies and other bodies with temporary relaxation of company filing requirements and requirements relating to meetings including annual general meetings (AGMs).

Flexibility for companies in financial difficulty

Where a company is in financial difficulty the Act provides for:

• A moratorium for companies which prevents creditors from taking action against the company while it seeks to restructure or formulates another form of rescue.
• During the moratorium, a wider range of suppliers to companies (compared to the previous list in the Insolvency Act 1986) will be prevented from relying on a clause in their supply contracts entitling them to cease supply in the event of the company’s insolvency.
• Adding new provisions into the Companies Act 2006 to provide a new form of Scheme of Administration that would permit court approval without the need for creditor approval.

Suspension of personal liability for directors of companies trading whilst insolvent and protection of companies from aggressive creditor action

Where a company continues to incur liabilities when the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvency, the directors can be held personally liable for the losses thereby incurred in the event that the company goes into administration or liquidation  – this is covered by the wrongful trading provisions in the Insolvency Act 1986.  The Act suspends the director’s personal liability between 1 March 2020 and 30 September 2020  requiring the courts to assume that the person is not responsible for any worsening of the financial position of the company or its creditors.

As the wrongful trading provisions apply to charitable incorporated organisations (CIOs) it is believed that this provision will also benefit the charity trustees of CIOs.

The Act further imposes restrictions on the reliance on statutory demands served between 1 March and 30 September 2020 (failure to settle a statutory demand being evidence of a company’s inability to pay its debts as and when they fall due), the presentation of winding up petitions and the making of winding up orders if the debtor company is only unable to pay its debts as a result of the COVID 19 epidemic. There are set periods between which these measures will apply. Any winding up order based on a winding up petition caught by these provisions presented between 27 April and 30 September 2020 will not be granted.  Provisions have been made to deal with winding up orders granted before the Act came into force. 

Easing of company and other qualifying bodies filing and meeting requirements

Filing

The Act extends deadlines for certain company filings (including the periods specified in the Companies Act 2006 for filing company accounts and annual confirmation statements) and for registering charges. This is in addition to the three-month extension for filing accounts with Companies House announced on 25 March 2020.

Meeting requirements for companies and other qualifying bodies

Companies, including charitable companies, charitable incorporated organisations (CIOs) and Scottish CIOs and mutual societies (including co-operatives and community benefit societies and friendly societies) will be allowed between 26 March and 30 September 2020 to hold their members meetings remotely by electronic means (even if this is not permitted by their constitution) and can postpone holding any AGM up to 30 September 2020 (subject to further extension by the government) where the AGM is required to be held between 26 March and 30 September 2020.

Other Charity related matters

All of the above provisions apply to charitable companies and some (where stated) apply to CIOs but what about those charities that are not corporate entities such as charitable trusts and charitable associations?   For these organisations there is no separate legal entity contracting with third parties and it is the trustees who are ultimately responsible and potentially liable for any losses.

Ensuring that the charity is financially viable is a key responsibility of the charity trustees and the Charity Commission has published COVID-19 guidance to help trustees ensure that they are able to manage their way through these difficult times. See https://www.gov.uk/guidance/manage-financial-difficulties-in-your-charity-caused-by-coronavirus

This includes by way of overview:

• obtaining as accurate a picture as possible of the charity’s current financial situation, focusing on cash flow management.
• considering options for minimising costs and protecting and increasing income.
• regularly monitor and review the charity’s operations and finances.

The Commission has also confirmed (as mentioned in a previous Lupton Fawcett Charities briefing) that it will take a more relaxed approach when it comes to its requirements so far as running a charity is concerned particularly in relation to the feasibility of charities holding face to face meetings. It has since provided further COVID-19 guidance covering a wide range of topics including the holding of remote meetings, AGMs (with the possibility of postponing or even cancelling them) and a range of financial matters. The link to the Charity Commission’s guidance is:  https://www.gov.uk/guidance/coronavirus-covid-19-guidance-for-the-charity-sector#further-advice-on-managing-financial-difficulties

If you or a charity for which you act are concerned about any of the issues raised in this article or have any queries about the management of your charity in these unprecedented times please contact Charity expert, Katie Dawson, on 01904 561408 or katie.dawson@luptonfawcett.law