Corporate Insolvency and Governance Act Explained

The Corporate Insolvency and Governance Act 2020 is a major piece of UK legislation designed to modernise and reform the law governing companies in financial distress in England and Wales (as well as the wider UK in certain respects). It came into force on 26 June 2020 and introduced significant changes to the way businesses facing financial difficulty can seek rescue and restructuring, alongside temporary measures introduced in response to the COVID‑19 pandemic.

This article provides a clear, practical explanation of the Act's key provisions, how they work, and what they mean for directors, creditors and stakeholders. It is written for readers without legal training but will also be useful for solicitors and students seeking a comprehensive overview of this pivotal law.

What the Act Is Aimed At

The Act's primary objectives are to:

• Support viable companies in distress by providing tools and processes that promote rescue and restructuring rather than immediate insolvency.
• Give businesses breathing space from creditor action while they explore options for recovery.
• Modernise insolvency law to align more closely with international best practice.
• Temporarily ease certain obligations on companies during the pandemic (such as meeting and filing requirements).

The Act accomplished these aims by introducing both permanent structural reforms to UK insolvency law and temporary corporate governance measures.

Permanent Changes to Insolvency Law

Moratorium: Breathing Space to Restructure

One of the most important permanent reforms is the introduction of a moratorium. This is a formal cooling‑off period that gives a company in financial difficulty a limited period - typically 20 business days - of protection from creditor enforcement action while it explores rescue options. During a moratorium:

• Directors remain in control of the business (a “debtor‑in‑possession” model).
• Creditors cannot take action to recover debts (such as issuing winding‑up petitions or enforcement) without court permission.
• A monitor (a licensed insolvency practitioner) oversees the process and confirms that a rescue is likely.
• The initial period can be extended once or more with creditor consent or by court order.

The moratorium is intended to offer structured time and legal protection so that a company can consider options such as new investment, refinancing or a formal restructuring plan.

Restructuring Plan: A New Tool for Rescuing Companies

The Act introduced a new statutory procedure known as a restructuring plan under the Companies Act 2006. This gives a financially troubled company the ability to propose a plan to compromise and restructure its debts. Key features include:

• Creditors and shareholders are split into classes based on the similarity of their rights.
• If classes approve the plan by the required thresholds (usually 75% by value), and the court sanctions it as fair and equitable, the plan becomes binding.
• Notably, the court can approve a cross‑class cram down where dissenting classes are bound by the plan if fairness tests are met.

This mechanism is intended to enable companies to reach agreements that would otherwise be blocked by a minority of dissenting creditors, making consensual rescue more achievable.

Suspension of Termination (Ipso Facto) Clauses

The Act also included significant changes affecting supply contracts and “ipso facto” termination clauses:

• Suppliers cannot automatically terminate contracts for the supply of goods and services solely because a company enters a moratorium, a restructuring plan or insolvency procedure.
• This protects companies in distress from being cut off from essential supplies when they are seeking to recover.
• Certain exceptions apply, and suppliers may be relieved of continuous supply obligations if this would cause them hardship.

This change mirrors international practice and aims to reduce the risk that critical suppliers withdraw support at the start of a rescue process.

Temporary Measures Introduced in Response to COVID‑19

The Act also implemented temporary changes intended to offer relief during the pandemic. Although many have now expired, they were significant at the time:

• Suspension of wrongful trading liability for directors trading during the pandemic - this was intended to reduce personal liability risk while trying to keep the business afloat.
• Restrictions on issuing statutory demands and winding‑up petitions where the company's financial difficulty was due to the pandemic.
• Relaxation of company meeting and filing requirements, including extensions of deadlines and provision for virtual meetings.

These measures have largely ceased, but they formed a key part of the Government's support package at the time.

Practical Impact: What This Means for Companies

For Directors

Directors considering a moratorium or restructuring plan should:

• Obtain professional advice early, including from licensed insolvency practitioners.
• Prepare clear evidence that rescue is reasonably likely, as the monitor must certify this.
• Understand that they remain responsible for running the business day to day during a moratorium.

Limiting wrongful trading exposure during crisis periods was a temporary relief; the usual duties and expectations on directors remain otherwise unchanged by the Act.

For Creditors

Creditors need to be aware that:

• A moratorium can delay enforcement actions unless the court allows them.
• Under a restructuring plan, even a creditor that dissents may be bound by a court‑sanctioned plan (in a cram‑down situation).
• Contractual rights to terminate supply agreements are more limited under the Act.

Common Questions About the Act

Does the moratorium mean the company is insolvent?
Not necessarily. A moratorium may be used when a company is insolvent or likely to become insolvent; its purpose is to facilitate restructuring before a formal insolvency procedure is needed.

Is the restructuring plan the same as administration or a company voluntary arrangement (CVA)?
No. A restructuring plan is a separate process and operates alongside or instead of traditional procedures like a CVA or administration. It offers more court‑controlled flexibility in binding dissenting creditors.

Are wrongful trading provisions permanently removed?
No. The suspension introduced by the Act was a temporary measure linked to the pandemic and is not a permanent removal of directors' duties on wrongful trading in general.

Key Takeaways

The Corporate Insolvency and Governance Act 2020 brought in the most substantial reforms to UK insolvency law for decades. Its permanent measures - the moratorium, restructuring plan and restrictions on ipso facto clauses - provide companies in financial difficulty with clearer paths to restructure and rescue. Temporary measures provided crisis‑related relief during the pandemic, although most have now expired.

The Act reflects a shift in policy towards supporting viable businesses to recover rather than be forced immediately into traditional insolvency processes, while balancing creditor rights and contractual protections.

James William Steven Parker

James is the founder of UKLegalGuides.com and a former agent at the Ministry of Justice (UK). With a background in processing legal claims, he launched this platform to make the laws of England and Wales accessible to everyone.