08 Apr 2020
COVID-19 Advice for business - Insolvency rules relaxed
Last week the government announced changes to the Insolvency Regulations during the COVID-19 pandemic to enable UK companies to continue trading.
Alok Sharma, the Secretary of State for Business said that they will give firms ‘extra time to weather the storm’ for companies to ‘bounce back’ after the crisis has passed. Legislation in relation to these changes is due to be enacted at the earliest opportunity. Below is an outline of the position as currently understood.
Supply to business
The new rules will allow companies undergoing restructuring to maintain access to essential supplies such as; utilities, raw materials and IT infrastructure whilst they are attempting to rescue their company. It seems likely that the government will simply extend the existing essential supplies regime under sections 233 and 233A of the Insolvency Act 1986.
Temporary suspension of wrongful trading
There will also be a temporary suspension of wrongful trading provisions for company Directors to remove the threat of personal liability during the pandemic, this will apply retrospectively from the 1st of March for three months.
Laws on fraudulent trading – where the Director knowingly carries on business with intent to defraud creditors or others for a fraudulent purpose – are not being relaxed.
The emergency legislation will also include a short moratorium or ‘breathing space’ that will give companies who are ‘in financial stress but viable’, time to explore options for rescue or restructure and will prevent creditors enforcing debts during that period. There are uncertainties surrounding the detailed workings of this, but it is said that the moratorium will initially last for 28 days and could be extended for up to 56 days in certain circumstances.
Sources said UK laws could be brought in-line with US chapter 11 bankruptcy rules, which enable firms time to pay off their debts over time while remaining in business.
In order to obtain a moratorium, an Insolvency Practitioner will need to confirm that they are satisfied that certain qualifying conditions have been met.
New restructuring procedure
This is an innovative proposal for a new restructuring procedure to bind all creditors using a ‘cross-clam down provision’ which can be imposed on dissenting creditors that are no worse off than a liquidation scenario. This will mean that dissenting creditors may be bound to an arrangement that is in the best interests of all stakeholders. Classes of creditors would need to vote 75% (by gross value) in favour of the procedure, with the courts having a role in the process. No time is proposed for the restructuring plan to allow for flexibility whilst a moratorium can be used whilst a plan is being formulated.
Parliament is currently in recess until late April but we will continue to monitor for further news from these announcements and keep you updated when we have more detail.
Hayley Simmons, Head of Insolvency & Advisory for Shaw Gibbs adds
The full details of the insolvency law reform have not been provided to date and are not yet in law. Given the changes that have been made to the wrongful trading provisions it is possible that more wide-reaching changes could be made to prevent any creditor action connected to the COVID-19 pandemic.
It is worth noting that the current insolvency laws still stands and that Sharma has stressed that all other checks and balances that help to ensure Directors fulfil their duties will remain in force. This means that even with wrongful trading laws suspended, a Director could still have personal liability where they act in breach of their duties. Also, Directors need to continue to exercise good sense and act in the best interest of creditors where their company is financially distressed or potentially insolvent. This includes taking professional advice where appropriate, protecting the company’s assets and not preferring particular creditors over others.