UK Government announces Insolvency Law reforms due to COVID-19

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.

Wrongful Trading

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:

  • a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
  • protection of their supplies to enable them to continue trading during the moratorium; and
  • a new restructuring plan, binding creditors to that plan.

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:

Moratorium

  • A new moratorium will be available to all companies (with some exceptions) based on a prospective insolvency test, i.e., that the company will become insolvent if action is not taken. The moratorium will not be available to companies that are already insolvent.
  • A company seeking the moratorium will need to establish that the prospect of rescue is more likely than not.
  • The moratorium will prevent creditors from taking enforcement action while the company considers rescue options.
  • Once commenced, the moratorium will last up to 28 days with the possibility of being extended for a further period of 28 days (or potentially longer).
  • Creditors’ interests will be protected through the appointment of an authorised monitor, who will monitor compliance with the specified moratorium conditions.
  • The moratorium will be triggered by filing the necessary paperwork at court, similar to the current procedure for appointing an administrator out of court, and a court hearing will not be necessary.

Supplier Termination Clauses

  • Termination clauses (or ipso facto clauses) for insolvency will be prohibited (subject to some specified exceptions, such as if the counterparty would suffer undue financial hardship).
  • Other termination clauses, such as non-payment, will remain unaffected.

New Restructuring Procedure

  • A new standalone restructuring procedure will be introduced, allowing a company to bind all classes of creditors, both secured and unsecured, to the restructuring plan through the use of a cross-class cram down procedure.
  • The new moratorium will be available to companies considering using the cross-class cram down procedure to enable it to have time to prepare its proposal to creditors.
  • The procedure will be available to both solvent and insolvent companies (acting through its insolvency office-holder).
  • The process will closely resemble that for schemes of arrangement under the UK Companies Act 2006.
  • There will be minimal prescription as to the terms of the restructuring plan, and it will be up to the company to determine the appropriate restructuring proposal to present to its shareholders and creditors.
  • The courts will retain their absolute discretion whether or not to confirm a plan on just and equitable grounds.

Winding-up Petitions

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.

Conclusion

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.

www.lexology.com
9 April 2020

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