Coronavirus (COVID-19) new insolvency rules

Coronavirus (COVID-19) new insolvency rules

Kate Rogers, barrister at Radcliffe Chamber, discusses the proposed new insolvency rules which are aimed at supporting businesses through the coronavirus (COVID-19) pandemic.

The government has proposed imminent new insolvency rules with the aim of helping more businesses weather the coronavirus storm and avoid entering an insolvency process. The overriding objective is to assist UK companies to keep trading while restructuring. The measures proposed to give this breathing space are set to include a suspension of the current wrongful trading provisions and a new moratorium for businesses undergoing a restructuring process.

Wrongful Trading

These proposal are very new and therefore it is not yet clear what exact form they will take, however, it appears that the ability to hold directors personally liable for the additional net shortfall to creditors incurred during a period of wrongful trading, pursuant to section 214 of the Insolvency Act 1986, will simply be suspended (retrospectively) from 1 March 2020 until such date as the government determines. Presumably this will have to continue for longer than the immediate pandemic to allow those companies who became of a doubtful solvency position during the pandemic to rescue. This is a bold step taken by the government and it is worth noting that R3 advised the government against such a blanket suspension of the wrongful trading provisions, owing to the risk of abuse by directors.

New moratorium and restructuring

There will be a new moratorium preventing creditors applying for administration orders or petitioning for the winding up of the company while the company seeks a rescue or restructure. During this time the company’s supplies will be protected so that the company can continue to access raw materials and utilities. Early indications from government are that this will include a restructuring plan that will bind all creditors. These plans are not in fact new; some may remember that proposals for new corporate restructuring procedures were consulted on in 2018. The government is currently saying that the new legislation due shortly will incorporate these already proposed changes (it appears to be more a case of bringing them into legislation quickly). Looking at the proposals made in August 2018, if they are enacted without modification, then the changes we can expect are: 

  • Moratorium—distressed companies which are ultimately viable will be given a period of time (an initial period of 28 days with the possibility of extension) when creditors (including secured creditors) cannot take action against the company, allowing it breathing space to restructure or seek new investment. This will be modelled on the same parameters as the administration moratorium. Directors would remain in control of the company, but creditors’ interests would be protected by the appointment of an authorised supervisor (called a ‘monitor’). Entry into this moratorium will be by filing a notice at court together with the monitor’s consent to act and thereafter notice being given to all creditors (unless there is an outstanding winding up petition, in which case, the company will need to apply to court). It will then be open to creditors to challenge the moratorium by application to court. It is likely that the moratorium available in Schedule A1 of the Insolvency Act 1986 will be repealed in due course in light of these new provisions
  • Prohibition on suppliers enforcing termination clauses in contracts—this is the method that is likely to address the government’s new proposal that companies will be able to access supplies during a restructuring. Suppliers of goods and services will not be able to enforce termination clauses in contracts on the basis that the company has entered an insolvency process / is subject to the new moratorium / the new restructuring plan (subject to the supplier being able to make an application to court in cases of extreme hardship). It is likely that in any subsequent insolvency process a supplier would have super priority for supplies made during the moratorium
  • New restructuring vehicle—this is the ‘restructuring plan’ which would include the ability to bind dissenting classes of creditors who vote against it. The plan will require 75% of creditors by value, in each class of creditor, to vote in favour (subject to modifications for connected parties). This is intended to be a flexible plan that can be agreed between the company and its creditors. It is the government’s intention to legislate in a way that means the restructuring plan will closely follows schemes of arrangement. There will be a right of appeal to the court if necessary. Note that the moratorium and the restructuring plan are distinct and do not have to be used together

In addition to the above, the Business Secretary, Alok Sharma, has announced that Annual General Meetings can be held flexibly in a manner compatible with the current public health guidance, eg online by way of a platform such as Microsoft Teams, or by phone with only proxy voting.

Those advising directors are in a difficult position during this hybrid period where these changes have been announced, but not finalised, and no legislation has yet been passed. Unfortunately, this situation will likely continue for some time as Parliament is not due to sit until the latter half of April. Despite this, I do consider that these proposals can give directors some comfort in this interim period. The new moratorium and the restructuring plan of course cannot be used until they have been brought into legislation, however, the relaxation of the wrongful trading provisions can be relied upon to some extent for present purposes. The Government has made a clear announcement that such a relaxation will come into being and will be retrospective. In light of that, combined with both the unprecedented situation that the country is in and the whole approach of Government being towards protecting businesses on a scale never seen before, I consider that it would take a heavy handed court to criticise IPs and directors for allowing some leniency in the period before new rules come into force.

While the enactment of these provisions looks set to bring some relief to businesses struggling in this current crisis, it’s important not to forget that all other checks and balances to help ensure that directors fulfil their duties properly remain in force

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.