Coronavirus (COVID-19)—proposal for temporary changes to UK insolvency law

Coronavirus (COVID-19)—proposal for temporary changes to UK insolvency law

The coronavirus (COVID-19) crisis has unsurprisingly had a significant impact on businesses around the world, putting many at real risk of insolvency. Some jurisdictions have made temporary changes to their insolvency laws to assist companies (and their directors) and individuals given the current uncertainty of how long the crisis will last, and therefore what its lasting effects will be. The Insolvency Committee of the City of London Law Society (CLLS) has submitted a paper to the Insolvency Service entitled ‘Proposals for mitigating the short term effects on viable businesses of covid-19’ suggesting a number of temporary changes to UK insolvency law.

The CLLS’ paper can be found by clicking on the link below:

Proposals for mitigating the short-term effects on viable businesses of COVID-19

 

What does the CLLS’ paper say?

The first point to note is that the proposed changes focus on assisting businesses that are viable, but which may suffer short term disruption to cash flow as a consequence of the coronavirus crisis. They are not intended to provide a solution to the problem of businesses which cease to be viable as a consequence of the coronavirus crisis.
 
The objectives behind the proposed changes are:


  • to give businesses a short breathing space in which to deal with any short term liquidity or trading issues caused by the crisis
  • to provide an additional mitigating factor in relation to wrongful trading claims and avoid directors incurring personal liability for steps taken during the crisis, and
  • to mitigate the risk of a ‘domino effect’ where the failure of one business triggers the failure of other associated businesses

The proposed changes include:

  • introducing a process where directors can swear and electronically file at court a so-called ‘Covid-19 Declaration’ which would trigger a 90 day grace period, and render any winding-up petition presented within the grace period to be invalid, unless pre-approved by the court. Directors making a declaration without reasonable grounds would be subject to sanctions, and the government would need impose a long-stop date after which it would be no longer possible to swear a declaration. Only one declaration could be sworn, unless legislation permitted successive declarations
  • permitting companies to obtain a moratorium of up to 90 days identical to the administration moratorium currently available under paragraph of Schedule B1 to the Insolvency Act 1986 (IA 1986), expanding the current requirement for directors to have a settled intention to appoint administrators to where directors have an intention to put in place measures to overcome a temporary coronavirus-elated liquidity crisis in order to avoid insolvency or, if that is not possible, appoint an administrator. The moratorium could be set aside by the court on proof that there is no realistic prospect of creditors being paid in full after the crisis has passed. Liabilities incurred during this moratorium period should be afforded super-priority over pre-moratorium unsecured liabilities in the event the company subsequently enters into an insolvency process
  • amending the wrongful trading provisions in IA 1986, s 214 to remove personal liability for directors (i) where, if acting reasonably, they misjudge the potential negative impact of the coronavirus crisis on their business or (ii) for any indebtedness incurred under the emergency borrowing arrangements provided by or supported by the government to assist in this crisis
 

The CLLS paper contains further details in respect of the above summary proposals.

Additionally, the CLLS has called on HMRC to adopt a supportive role during the grace period, and has questioned whether the proposal to reintroduce Crown preference from December 2020 is a sensible one in the current climate. It has also raised its concern about the new criminal sanctions in the Pensions Schemes Bill which might discourage companies drawing down on secured facilities if that could have the effect of having a material detrimental effect on the defined pension scheme if the company does not ultimately survive as a result of the coronavirus crisis.
 

What are the prospects of these proposals being implemented?

It is currently unknown whether the government will make any changes to UK insolvency law, but the latest Dear IP (issue 92, March 2020) states that the government is considering (in addition to the raft of emergency measures announced by, among others, the Chancellor) what emergency legislation—and measures short of legislation—could be introduced to help struggling businesses. The Insolvency Service has acknowledged that its stakeholders have been in touch to propose possible measures, and that these and more are being considered urgently.
 

What changes to insolvency law have been made in other jurisdictions?

 
A number of jurisdictions have already announced (in some cases, enacted) changes to their insolvency law in reaction to the coronavirus crisis, including:

  • The Netherlands, and its WHOA scheme
  • Germany, and the suspension of the strict requirement for directors to file for insolvency without undue delay and in an event within 21 days of becoming illiquid or over-indebted
  • Hong Kong, and restructuring procedure based on the US chapter 11 process
  • Spain, and disapplication of the obligation of directors to file for insolvency within two months
 
 

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.