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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.
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 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.
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