Covid-19 Corporate Insolvency Law update - July 2020

The Corporate Insolvency and Governance Act received Royal Assent on 25 June heralding a further shift towards the US Chapter 11 company rescue approach to corporate insolvency. The Government line is that the new measures are to support business from the impact of Covid-19 but the two new flagship insolvency processes actually stem from a Government consultation in 2016 to keep the UK in step with EU reforms and World Bank requirements.

The messaging is all about helping companies that would be viable but for Covid-19 to protect jobs and put them in the best possible position to bounce back by providing a breathing space and tools to maximise their chance of survival. The six insolvency measures are:

  • A Company Moratorium where no legal action may be taken for an initial 20 business days which can be extended for up to twelve months with creditor or court consent. The company must be unable or likely to become unable to pay its debts as they fall due but remains under the control of the directors who appoint a Monitor (a licensed insolvency practitioner) to oversee the process.  
  • Termination clauses are made void so suppliers will not be able to refuse to supply or call for ransom payments when a company enters an insolvency or restructuring procedure.  
  • A Restructuring Plan modelled on the existing scheme of arrangement court driven procedure but with new powers to bind secured creditors and "cram down" dissenting classes.  
  • Three temporary measures to restrict statutory demands and winding up petitions and the suspension of wrongful trading until 25 July 2020.

Every little helps and the changes have been broadly welcomed by the insolvency profession and industry. However, we think the three permanent changes will have limited application for SMEs because:

  1. The new Company Moratorium process requires the Monitor to make a statement that the Moratorium is likely to result in the rescue of the company as a going concern and the company has to have sufficient cashflow to pay liabilities incurred from the commencement of the moratorium and pre-moratorium finance commitments as they fall due. Both of which are tall orders. Also it mirrors and replaces the Moratorium for a CVA which was available to small companies but little used.  
  2. We hardly ever encounter termination clauses being exercised or ransom payments being demanded in insolvencies. Most suppliers are simply grateful for the opportunity to continue to trade with us.  
  3. The Restructuring Plan is a variation on the existing Scheme of Arrangement that has been around since the 19th century and is used to restructure debt in large companies with complex debt structures. We have never seen it used for SMEs because it involves multiple court applications and is seen as too complex and disproportionately expensive.

So for now it remains largely business as usual for insolvent SMEs.

However, the Finance Bill 2020 currently going through Parliament is set to make directors jointly and severally liable for their company's tax liabilities where they have a second insolvency in a five year period and have "artificially and unfairly" sought to reduce their tax bill and from 1 December 2020 Crown preferential creditor status returns.  We think they could be game changers for SMEs and will update you further once they become law. 

Here at McTear Williams & Wood we are ready to help you navigate a way through this crisis.  If you have any concerns you can send us a question, use our free Business Healthcheck or simply get in touch.

It is business as usual at McTear Williams & Wood.