In the Corporate Insolvency and Governance Bill, the UK government has announced changes to insolvency law designed to protect businesses affected by COVID-19 generally and from action by landlords in response to what has been described as “aggressive rent collection”. Draft legislation has been published with a view to it being passed into law as soon as possible.
Wrongful trading / trading while insolvent
There is to be a suspension of the wrongful trading provisions of the Insolvency Act. Effective from 1 March until 1 June 2020, this change seeks to remove the threat of directors incurring personal liability for ‘trading while insolvent’ during the pandemic.
In our view, this change to the law is unnecessary as we consider it unlikely that a liquidator would have brought a claim against otherwise reasonable directors who tried to continue trading during the period that coincided with the peak of the pandemic in the UK.
This relaxation of the wrongful trading provisions was not to be treated as carte blanche to carry on business recklessly. Our advice to directors was to remain diligent about their conduct and take professional advice where appropriate as other legal risks remain in relation to that period, for example in relation to misfeasance, preferences and transactions at undervalue. Disqualification remains a risk for directors in cases of misconduct.
New insolvency measures
In August 2018, following a consultation on changes to the corporate insolvency regime, the government announced plans to introduce new restructuring procedures and it now intends to fast-track this implementation. The measures will incorporate the following.
A moratorium for companies in financial distress
The Bill introduces the possibility of a moratorium for an initial period of 20 business days for companies in financial distress to give breathing space against creditor action while they explore options for business restructuring and/or rescue. This new moratorium will provide comprehensive protection from creditor enforcement and other legal actions against the company and its property. The period of moratorium can be extended for a further period of 20 business days by the company or for a period of up to one year with creditor consent.
There will be checks and balances and an insolvency practitioner will be appointed to monitor and oversee matters during the moratorium to ensure that creditor interests are protected.
The moratorium will only be available to companies that are viable and that the monitor considers can be rescued as a going concern. This requirement will restrict the use of the moratorium in practice and both the company and any prospective monitor will need to consider carefully the strategy and likelihood of achieving this objective.
Continued access to supplies
There is proposed to be a change to the use of termination clauses in supply contracts. As a result, where a company has entered an insolvency or restructuring procedure or obtains a moratorium, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or vary the contract terms with, the company (eg by increasing prices). The customer is required to pay for any ongoing supplies while it is in the insolvency process but is not required to pay amounts due for past supplies while it is arranging its rescue plan.
There are safeguards for suppliers if continuing supplies causes hardship to their business and a temporary exemption for small company suppliers during this period of crisis.
A new restructuring plan
This new procedure will be modelled on the existing English schemes of arrangement but with the ability for a company to bind all creditors (including secured creditors) through the use of a cross-class cram-down provision if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.
This new restructuring plan will be heavily reliant on court applications and hearings. As such, it is likely to be a process that is costly to implement and one that may require a significant period of time from commencement to implementation. We therefore expect this new procedure will not be suitable for most SMEs.
Temporary prohibition on the presentation of winding up petitions
The Bill prevents the presentation of a winding up petition by a creditor on the grounds of inability to pay debts between 27 April and 30 June 2020, or where the demand was made during the period 1 March to 30 June 2020. The temporary prohibition will not apply where the creditor has reasonable grounds for believing that the coronavirus has not had a financial effect on the company, or that the company would still have been in financial difficulty even if the coronavirus had not had any effect.
Tax and government legislation, sourced from gov.uk is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate advice from their financial adviser before making financial decisions. Correct as at 12th June 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.