COVID-19: Proposed Changes to UK Insolvency Laws

After weeks of anticipation the Business Secretary Alok Sharma has now outlined changes to insolvency laws as a result of COVID-19. Some existing law will be temporarily suspended to cover the current crisis and other new laws already in contemplation are to be rushed in, accelerated by the pandemic.

The measures, Mr Sharma says, will reduce the burden on business and give bosses much-needed breathing space and keep their companies going.

In response the CBI has welcomed the interventions saying that the measures will give much-needed headroom for company directors to enable otherwise viable businesses to use the Government's support package and weather the crisis. However, without the enabling legislation we still lack the detail of how the provisions will apply in practice.

Temporary relaxation of wrongful trading legislation during the COVID-19 crisis

By far the most immediate and impactful measure would appear to be the announcement that wrongful trading claims pursuant to s.214 Insolvency Act 1986 ("IA86") will be suspended – initially for a three month period (but potentially to be extended).

So, when it comes to considering how to get through the next few months, be it continuing to trade or mothballing through the period with the various government packages on offer, it is thought that directors should be able to make those decisions knowing that they will not face potential personal liability for wrongful trading.

The protection looks to be retrospective, applying from 1 March 2020. We await further clarification as to the implementing legislation, but the government says this will be introduced to Parliament at the earliest opportunity (we understand that this is likely to be after the Easter period). The Government believes that the relaxation of the wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.

Whilst this is welcome, directors still need to give thought to their duties which continue. What haven't, and won't be changed, and should continue to be borne in mind when making decisions are the statutory duties a director owes. Acting in good faith in a way that promotes the success of the company for the benefit of its members (or creditors if insolvent) remains key.

Failing in these duties may still attract personal and/or criminal liability, for example under IA86 fraudulent trading and misfeasance claims, directors' disqualification or employment and company law.

Additionally, there has been no announcement to relax the antecedent transaction provisions for preference or transaction at an undervalue under IA86. Therefore, prudent director behaviour and conduct remains key, as does ensuring that questions and decision making are fully thought-through and recorded.

It is our view that the approach a director would ordinarily take when addressing wrongful trading (whether their company has a reasonable prospect of avoiding liquidation and whether it is taking every step possible to minimise the loss to creditors) remains appropriate and should continue to inform directors' decision-making.

We would expect directors to be assessing the long-term viability of the decisions they are making with reference to both prudent budget and cashflow forecasts (sensitised where necessary) and to changing creditor positions. The wrongful trading suspension is for three months initially but directors will be taking additional liabilities onto their balance sheets and will need to be sure of their ability to service those liabilities in the longer term when the wrongful trading provisions are no longer suspended.

COVID-19 - changes to insolvency legislation

The government also intends to implement changes to enhance the insolvency regime by providing UK companies a breathing space to enable them to keep trading while they explore options for rescue. It is thought that the measures will be based upon those announced by Government in 2018 and will include 1) a moratorium for companies from creditor action while they are seeking to restructure; 2) a new restructuring plan to bind all creditors based on our Scheme of Arrangement; and 3) protection of supplies to enable companies to continue trading during the moratorium.

We await the detail of the legislation but set out below what was put forward in 2018:

2018 proposed moratorium procedure for companies

The process resembles a directors' out of office court administration appointment to enable all companies (whatever their size) to file an application to court for a moratorium, initially for 28 days to allow time to formulate restructuring proposals without pressure from creditors. A company would have to meet eligibility criteria and have the consent of an Insolvency Practitioner to act during the moratorium as a 'monitor'.

Directors would stay in control of the company whilst the moratorium is in place and will continue to operate the business and propose the restructuring plan. The process would not be available to companies that have entered into a moratorium, administration or CVA in the last 12 months. Permission from court to commence a moratorium would be required where there is a pending winding-up petition together with consequential changes to s.127 IA86.

The suggestion has been made recently, that a more innovative use of the administration process by IPs working with directors, focussing on Purpose 1 (rescuing companies), could achieve similar results.

2018 proposed measures on suppliers

The proposals also saw suppliers being prevented from enforcing termination clauses upon an insolvency event whilst the moratorium is in place, which bolsters the breathing space for the distressed company. Such suppliers would begiven super-priority as an expense of the moratorium.

What insolvency measures as a result of COVID-19 haven't we seen yet?

So far there has been no moratorium on the presentation of a winding-up petition against a company, a measure that any creditor with an unpaid debt of £750 can take. The court has though announced a blanket adjournment of hearings of pending winding-up petitions and the majority of bankruptcy petitions of at least 12 weeks. So far, however, there have been no consequential changes to s.127 IA86 or s.284 IA86 to validate post-petition dispositions.

Nor has there, as many have expected, been any change to the threshold for the minimum debt to present a bankruptcy petition (currently £5,000) or a winding-up petition (currently £750). In Australia for instance, the threshold debt has temporarily been increased to $20,000 for both individuals and companies and the time for complying with a statutory demand in either case increased from 21 days to six months.

Maybe it's a case of "UK, watch this space"?

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