UK Government’s Planned Changes to UK Insolvency Laws to Mitigate the Economic Impact of COVID-19
On 28 March 2020, the Government followed the footsteps of various countries including Australia, Germany and Spain and announced key measures to protect businesses facing severe funding and day-to-day operational difficulties due to the current COVID-19 pandemic. The measures will involve introducing legislation to make changes to existing insolvency laws in response to COVID-19 which will enable companies undergoing a rescue or restructuring process to continue trading and help them avoid insolvency.
Director’s Liability and Wrongful Trading
The current wrongful trading rules have been of particular concern for directors of companies in recent weeks, as the impact of COVID-19 puts a strain on viable businesses everywhere, and the duration of the crisis remains uncertain.
The existing wrongful trading provisions are set out in the Insolvency Act 1986 and provide that a director can incur personal liability for a company’s debts if they fail to take every step that a “reasonably diligent person” would take to minimise potential losses of creditors once they knew or ought to have concluded (at some time before the commencement of those proceedings) that there was no reasonable prospect of the company avoiding liquidation or administration. This is known as wrongful trading, and results in civil liability. A defence is available if the director took “every step” with a view to minimising potential loss to the company’s creditors.
What is the Wrongful Trading Suspension?
The UK government has announced a temporary suspension to wrongful trading provisions on 28 March 2020 to account for the exceptional circumstances posed by the COVID-19 pandemic. Once implemented, the suspension would apply retrospectively from 1 March 2020 for three months, but the UK Government has also stated that provisions will be included to enable the changes to be extended if necessary.
How do the COVID-19 insolvency law reforms help directors?
The suspension of the wrongful trading provisions at least during March, April and May (the legislation will provide for the changes to be extended if necessary) will give directors the time and confidence they need to assess the needs of and future viability of their business in a clear-headed manner.
What is the 2018 Moratorium Proposal?
In addition to the wrongful trading suspension, the UK government recently announced that it will fast-track legislation to implement the insolvency reforms announced in August 2018. These proposals followed on from its 2016 and included:
- A new moratorium allowing solvent companies (that would otherwise risk becoming insolvent) a period of time in which creditors cannot are not able to take action against them. This will allow the companies time to commence restructuring or alternatively procure investment. The moratorium would be triggered by a court filing and have an initial 28-day life, capable of being extended by another 28 days (any extension beyond 56 days will require approval of majority of secured and unsecured creditors or the Court).
- A prohibition on suppliers exercising termination rights in contracts for the supply of goods and services on the grounds that a counterparty has entered a formal insolvency procedure, the new moratorium or a restructuring plan.
- A restructuring “plan” which will bind all dissenting classes of creditors.
How do the coronavirus insolvency reforms impact creditors?
These measures will likely have a significant impact on the position of creditors and their existing rights to seek repayment of overdue indebtedness.
If a company enters a formal insolvency process, the new pre-insolvency moratorium procedure outlined above prohibits termination of contracts on the grounds of enforcement of termination clauses in contracts which trigger upon the financial condition or formal insolvency of a debtor company. The counterparties will therefore have to continue to fulfil their contractual obligations.
It should be noted that this prohibition will not prevent termination for reasons of non-payment or the exercise of any other right to terminate that might exist under the relevant contract.
Perhaps inevitably, that balance is likely to favour debtor companies more than creditors and that is bound to be of concern to creditors whose businesses.
What next for insolvency during COVID-19?
The wrongful trading suspension is a helpful step by the government to ease the strain on responsible directors dealing with an unprecedented blow to the business.
The government’s announcement can be found here and the full details of proposed legislation is currently not available. Due to the Parliament’s early Easter recess, it seems unlikely that these reforms could be put before Parliament until late April at the very earliest.
Instruct Specialist Winding Up Petition Solicitors
We are a specialist City of London law firm made up of Solicitors & Barristers and based in the Middle Temple Inns of Court adjacent to the Royal Courts of Justice. We are experts in dealing with matters surrounding insolvency in particular issues. Our team have unparalleled experience at serving statutory demands, negotiating with debtors/creditors, setting aside statutory demands and both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules.