Insolvency measures in the shadow of 2020

With businesses up and down the country having been severely affected by the Covid-19 lockdown measures, the UK Government has announced and implemented a number of relief measures to help keep businesses afloat and to mitigate the effects of the impending recession. These measures include making grants available, allowing rates reliefs and providing assistance to and for employees and other workers. Hopefully these measures will enable many businesses to survive the immediate effects of the pandemic and economic shock, and to plot a course for survival.

It is however inevitable that a number of businesses will suffer or fail. Affected businesses will need to look to the framework of insolvency legislation, and some of the Government announcements and measures have concerned this.

There has also been an effect on insolvency practice, both in the constraints on how advice can be taken and procedures are implemented. This is evident not least in the making of statutory declarations (which can be made remotely), the signing of forms and documents, but also in terms of court practice, allowing for remote hearings. The Temporary Insolvency Practice Direction that provides for this took effect on 6 April 2020 and remains in force until 1 October 2020.

The Government’s intention is to give breathing space to companies, to allow them to keep trading while they explore options for rescue. The Corporate Insolvency and Governance Bill, published on 20 May 2020, has set out a number of measures of interest to companies, some of them permanent and some of them temporary.

It must be remembered that any of these temporary measures are intended only to apply for a finite period, but are also subject to review, amendment, withdrawal or extension. The temporary changes are retrospective, intended to deal with the period that Covid-19 has affected UK businesses.

Corporate Insolvency and Governance Bill

The Corporate Insolvency and Governance Bill is now subject to parliamentary debate, prior to becoming law. It includes seven main provisions as follows:

  • Introduction of a company moratorium
  • Introduction of a restructuring plan
  • Temporary restrictions on winding up petitions while the Covid-19 pandemic has effect
  • Temporary suspension of wrongful trading liability on directors while the Covid-19 pandemic has effect
  • Prohibiting termination clauses in supply contracts, preventing most suppliers from ceasing their supply or from demanding additional payments while a company undergoes a rescue process
  • Changes to the requirements for the holding of Annual General Meetings and General Meetings while the Covid-19 pandemic has effect
  • Extensions to Companies House filing requirements while the Covid-19 pandemic has effect

To explain some of the changes:

Company Moratorium

Insolvent companies or companies considered likely to become insolvent will be able to obtain a moratorium of 20 business days to enable them to restructure or gain investment, protected from creditor action.

The process would be overseen by an insolvency practitioner, acting as a ‘Monitor’, and would be initiated by the filing of papers at court to state that the company is or is likely to be unable to pay its debts, and that the Monitor considers that the business is likely to be rescued as a going concern. The moratorium can, on application, be extended for a further 15 business days.

The directors would remain in day to day control of the company during the moratorium, and the process would be binding on secured and unsecured creditors.

Restructuring Plan

The proposed restructuring plan is similar to schemes of arrangement, which can already be used. A restructuring plan would be binding on all creditors and would require a suitable proportion of each class of creditors to consent to the plan before it can be implemented.

Restructuring plans can be put in place for companies that are not facing the prospect of insolvency.

Winding Up Petitions

It is proposed that winding up petitions may not be presented until 30 June or one month following the Bill becoming law for unpaid debts following service of a statutory demand. This would be subject to certain conditions in addition to the time limits proposed.

Wrongful Trading

The Bill includes provision that directors will not be subject to the same threat of personal liability and compensation by continuing to trade while they know or ought to know that the company is at risk of insolvency, so long as it can be assumed that the directors are not responsible for the worsening of the company’s or creditors’ financial position during the period from 1 March 2020 to 30 June 2020 or one month following the Bill becoming law.

It must be noted that directors remain at risk of disqualification and for fraudulent trading during the temporary period described above.

While the measures will be welcomed by a number of businesses, particularly those at risk of failure in these troubled times, there will also be the risk of unintended consequences and abuse of some of the relaxations and new measures.

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Although correct at the time of publication, the contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.