The measures include temporarily suspending wrongful trading liability for directors and implementing a new restructuring plan and moratorium to provide companies with a period of time to explore rescue options during the coronavirus (COVID-19) pandemic.
On March 28, 2020 the UK government announced new insolvency reforms to support businesses through the COVID-19 outbreak. The measures include temporarily suspending wrongful trading liability for directors and implementing a new restructuring plan and moratorium to provide companies with a period of time to explore rescue options. The government said it would be introducing legislation to bring these measures into effect “at the earliest opportunity”. Parliament is currently in recess until 21 April 2020.
English insolvency law provides that directors may have personal liability if they do not take every step available to them to minimise losses to creditors if the directors knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvency.
The UK government has announced a temporary suspension of this rule, to apply for three months from March 1, 2020. The current rules have been a cause for unease over recent weeks, with directors understandably concerned about their own personal liability when continuing to trade. “Relaxation of these wrongful trading rules,” the government stated, “will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.”
The rules on fraudulent trading and director disqualification are unaffected.
New Restructuring Plan and Moratorium Procedure
In 2016, the UK government consulted on certain proposed reforms to corporate government insolvency laws, and announced its response to that consultation in 2018. The aim of the proposed reforms was to, among other things, minimise the likelihood and mitigate the impact of major corporate failure.
As announced by the UK government on March 28, 2020, new legislation will be introduced in Parliament at the earliest opportunity. The government stated that the new restructuring tools will include:
As ever, the devil will be in the detail and the draft legislation will need to be carefully scrutinised to understand the full impact of the changes. However, it is reasonable to expect that the reforms will be generally in line with those set out in the UK government’s 2018 Insolvency and Corporate Governance response, summarised below:
Supplier Termination Clauses
New Restructuring Procedure
Whilst the UK government’s announcement did not include any changes to the rules on winding-up petitions, the Insolvency and Companies Court has determined that winding-up petition hearings cannot be heard remotely. As such, all outstanding winding-up petition hearings have been adjourned until mid-June 2020 at the earliest. So although creditors are still able to threaten and, logistical issues aside, issue a winding-up petition, in reality there is going to be at least a three-month delay before any contested winding-up petition will be heard by the court.
Winding-up petitions can still be withdrawn by the creditor on a paper application to court.
Relaxation of the wrongful trading rules is a welcome intervention by the UK government in the current climate. Whether the further insolvency reforms will have a significant impact to businesses struggling during the COVID-19 pandemic remains to be seen, and will depend in part on the terms of the implementing legislation and how quickly that legislation can be passed as the UK government is in recess until 21 April 2020.
Many European countries have recently announced changes to their insolvency laws to protect businesses to the pandemic.
9 April 2020