Corporate Insolvency and Governance Act 2020 - what does it mean for third sector bodies?

In a previous update I outlined the impact for third sector bodies of some of the key measures introduced by what was then the Corporate Insolvency and Governance Bill.

On 25 June, after some minor amendments in the House of Lords, the Bill received royal assent. This latest update provides further insight on how the Act will affect third sector organisations in Scotland.

Wrongful trading

I referred in my previous article to the pressures faced by those serving on the boards of third sector companies in the current very challenging environment – and in particular, the risk (at least in theory) of personal liability under the “wrongful trading” provisions of the Insolvency Act if they allow the company to continue to operate beyond the point at which there is no longer a reasonable prospect of the company surviving.

In line with the approach taken in the Bill, the Act provides that the courts are to assume – for the purposes of the wrongful trading provisions - that directors are not responsible for any worsening of the financial position of the company in the period from 1 March to 30 September of this year (a longer period, incidentally, than envisaged in the Bill).

While this provides some comfort, unfortunately the wording is not ideal - there could still be liability under wrongful trading where the directors failed to take action during the period referred to above which led to loss to creditors after that period had expired. It would have been more helpful if the relaxation had exempted the directors from liability under wrongful trading in relation to any step which they take or fail to take during the relevant period, and irrespective of when the relevant loss was suffered.

A further concern relates to the reference to 30 September. It is widely anticipated that social distancing and infection control measures will continue to be required in many settings until at least the end of this calendar year. The financial impact of this on many third sector companies (particularly those where their services or other activities involve close interaction with service users and/or large gatherings of people) is such that many boards will be walking a tightrope maintaining the company’s solvency while maximising service delivery.

The Act also allows for amendments to be made to other corporate insolvency or governance legislation for the purpose of reducing the number of bodies entering insolvency procedures as a result of the pressures caused by the pandemic. This also mitigates the effects of that legislation on bodies that do enter insolvency proceedings. Unfortunately, the legislation which regulates the winding up of SCIOs is not included within the scope of these provisions – which leaves open the possibility that changes could be made which benefit some charities – those incorporated as companies – but not those which have adopted the SCIO model as their legal form.

Members’ meetings

I referred in my previous update to the relaxations which had been introduced to facilitate holding AGMs and other members’ meetings by way of skype or similar means – applicable to companies, SCIOs and registered societies. It is unfortunate that the opportunity was not taken to resolve issues of this kind for charities and other third sector organisations which have a different legal form e.g. unincorporated associations.

Also, it could be argued that the relaxations go too far, in sweeping away the rights of members to participate in ways other than voting. In particular, AGMs play an important role in a third sector context in holding the board to account – and it would have been good if the legislation had imposed an obligation to take reasonable steps to allow members to participate remotely.

A further dimension which is not addressed in the legislation is virtual board meetings. Some third sector organisations may therefore find themselves in the unusual position of being able to hold a virtual members’ meeting without any risk of technical challenge, but with technical queries still unresolved as regards their ability to hold a virtual board meeting. However, as we have discussed previously (including in this webinar), it would be reasonable to assume that the courts would take a sympathetic view in relation to virtual board meetings (even where there was some element of mismatch with the detailed wording in the constitution) given the much more significant issues of governance which would arise if board meetings were suspended for the period of lockdown.

Filing deadlines

As in the original Bill, the Act does not allow for the extension of the deadlines which apply to Scottish charities in relation to filing annual accounts with OSCR, nor for any relaxations regarding charity trustee duties. While OSCR have said they will take a proportionate approach given the circumstances, the legal requirements will remain – which is obviously far from ideal.

If you have any questions regarding any of the points noted above – or indeed any other issues relating to third sector governance or charity law - please do not hesitate to get in touch with a member of our team.