The new Corporate Insolvency and Governance Act: what does it mean for charities and social enterprises?

The Corporate Insolvency and Governance Act 2020 (the "Act") became law on 26 June 2020, although lots of the measures in it are backdated to earlier in the year. It has since been updated multiple times, including extending how long some of its temporary rules will apply. Its purpose is to lighten the compliance burden on businesses during the COVID-19 outbreak so that they can focus all their efforts on continuing to operate.

As far as charities and social enterprises are concerned, many of the measures only apply to companies, which would include charitable companies and community interest companies (CICs). However, the new rules about holding general meetings of members will also apply to friendly, co-operative and community benefit societies and charitable incorporated organisations (CIOs).

General meetings of members

The Act allows companies, friendly, co-operative and community benefit societies and CIOs to be more flexible when holding General Meetings (meetings of the members). 

As of 26 March, General Meetings no longer need to be held at any particular place, or with all attendees present in the same place, and votes can be cast by any means. Members no longer have the right to attend meetings in person, to participate in meetings otherwise than by voting, or to vote by any particular means. Effectively these new rules allow you to hold meetings entirely virtually, even if your constitution says otherwise.

The new rules only apply to meetings held between 26 March and 30 December 2020. If you were due to hold your AGM between 26 March and 30 September, you must have held it by 30 September 2020.

Companies in financial difficulties

The Act introduces some new rules about what happens when a company is facing serious financial difficulties (insolvency), aiming to give companies more breathing space to try and rescue or restructure. The rules are complex, but the key points can be broadly summarised as follows:

Three of the changes are permanent. Two are new insolvency procedures: a "moratorium" (during which directors can stay in control of the company and have some protection from creditors while they try to implement a rescue plan) and a "new restructuring plan" (a new, more flexible process which companies can use to try and agree a plan with creditors and members). The moratorium has some temporary provisions that only apply until 30 March 2021, and it is not available to private registered providers of social housing. The third permanent change is a further restriction on the ability of suppliers to rely on 'ipso facto' clauses that allow them to terminate a contract with a company facing insolvency or change its terms, which can often hamper attempts to rescue the company (small suppliers are exempt from this rule until 31 March 2021).

The following temporary changes will continue for the time being:

1. Usually, creditors can present a petition for a company to be wound up if they have formally demanded payment of a debt from the company and it has not been paid (a 'statutory demand'). Under the new rules, creditors cannot present a winding up petition on the basis of a statutory demand if it was served between 1 March and 31 December 2020.
2. More generally, no winding up petitions can be presented and no winding up orders can be made between 27 April and 31 December 2020 on the basis that a company cannot pay its debts, unless there are reasonable grounds for believing that the situation is not a result of COVID-19.

Filing requirements

The Act allows extensions to Companies House filing deadlines. Some of the extensions will be applied automatically, and the new rules are explained by Companies House here.

Comment

This long-awaited legislation was welcome news for many organisations, although only time will tell whether the new rules will make a material difference or just delay the inevitable for those with financial difficulties. 

The permanent changes to the insolvency regime are more widely significant, being the first major reform of insolvency rules in over 20 years. They reflect a 'rescue' culture, and could have a significant impact on the way insolvencies are handled going forwards.

This briefing was first published on 14 August 2020 and updated on 30 September 2020.