Covid-19 Insolvency amendments

Comments on proposed insolvency law amendments.

In response to Covid-19 the government has signaled its intention to make insolvency amendments to the UK law framework. (Governments in other countries have already brought in such measures.)

[NB. The shape of the last three measures can be guessed at as they were outlined in 2018 as part of the government’s response to a 2016 consultation process. However, nothing can be guaranteed of course and in the circumstances, when enacted, they may be very different.]

If you have any questions about how the proposed amendments might affect you or your business please don’t hesitate to contact us.

Alok Sharma – Secretary of State for Business, Energy and Industrial Strategy

The measures include:

1. Temporary suspension of wrongful trading provisions

To be introduced retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability.

a. These wrongful trading provisions [s214 Insolvency Act 1986] can make directors personally liable for debts a company incurs after the company became insolvent.

b. Suspension of this provision may give directors some comfort but the area remains ‘a minefield’ and we have yet to see the shape of the measures announced.

c. Once a company is insolvent directors need to be able to demonstrate that every step they took was thought to be in the best interests of creditors.

d. Fraudulent trading remains a live risk where a company obtains credit when there is no good reason for thinking that funds will be available to pay the debt. Directors will need to be very careful that they are honest and open with creditors they could otherwise leave themselves open to actions related to deceit or misrepresentation. Disqualification, personal liability and even criminal proceedings are possibilities for the unwary. Specialist advice is recommended.

e. Clearly the government is trying to encourage companies not to wind up unnecessarily. However, directors should not act recklessly. If a company continues to trade and then goes into liquidation the liquidator is obliged to investigate. On the same weekend that these measures were announced the government also informed us that normality may not return in the UK for 6 months. Directors who can’t demonstrate that they had a reasonable prospect of repaying credit incurred will be giving prospective liquidators ‘a decision to make’ about their conduct.

2. A pre-insolvency moratorium, or breathing space within which creditors will be unable to take enforcement action

a. The government proposed that a moratorium be available to companies that are not yet insolvent.

b. The company would remain under the control of its directors but the moratorium would be overseen by a ‘monitor’ (a licenced Insolvency Practitioner).

c. The monitor would be required to notify the court and Companies House, as well as all creditors, of the moratorium

d. Funds must be available to meet current obligations as well as those incurred in the moratorium period.

e. The moratorium will be 28 days in duration with further extensions available.

f. Not available to companies that have had a moratorium or insolvency event in prior 12 months.

3. Supply line protection facilitating trade during the moratorium

a. Government proposes that suppliers will be unable to use termination clauses if Admin or moratorium.

4. A new form of restructuring plan

a. Plans for this are based largely on a combination of the existing UK Scheme of Arrangement and the US Chapter 11 proceedings.

b. Available to solvent and insolvent companies.

c. The plan would require at least 2 court hearings. As such the costs of the plan may be such that it is not available to some SMEs.

d. Creditors divided by class. 75% of creditors need to vote to support plan.

e. No statutory office holder required.

f. Creditor debts will be written off as per the plan (even if there is a subsequent insolvency).


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