A major reorganisation and enhancement of UK Insolvency legislation was already being considered long before Coronavirus became a familiar term and the consultation process around the shape of new legislation has in fact been launched only recently within the Insolvency, Turnaround and Financing business community. However, as a responsive need at the outset of Lockdown in the UK, the Government announced some surprising temporary measures that were all intended to minimise the commercial impact of the lockdown and support businesses that might otherwise feel compelled to shut up shop permanently when faced with the challenges it presents.
The measures were introduced using existing executive powers with temporary impact but are now due to be formalised in a single piece of legislation that will amend existing legislation and introduce new and potentially far-reaching provisions that will have implications for all businesses.
Not driven exclusively by the need to respond to the impact of COVID-19 and the lockdown, the new legislation includes some additional measures that many in the Insolvency Profession consider have been necessary for some time. They are the result of major research and the hope is that they will help the economy to recover, give companies the best chance of survival and protect jobs.
The Corporate Insolvency and Governance Bill is expected to progress through Parliament shortly and should be largely unopposed. The Bill can be viewed here and the most significant issues from a business support perspective are discussed below including 2 measures that are simply intended to recognise the practical difficulties of companies complying with some non-financial procedural requirements for the duration of the COVID-19 response.
Suspension of Wrongful Trading
The threat of directors’ personal liability for Wrongful Trading (sometimes incorrectly referred to as Insolvent Trading) will be temporarily removed.
This is one of a number of offences introduced by the Insolvency Act 1986 as part of a range of measures intended to apply some “stick” alongside the “carrot” of the corporate rescue culture it was designed to support. However, in the face of lockdown, it was inevitable that many businesses in the UK would be plunged almost instantly into a technical and practical state of insolvency, causing a dilemma for responsible directors; should they risk continued trading or should they accept fate and close?
Wrongful Trading can only be pursued by a liquidator or administrator after a company has gone into a formal insolvency process and it assists them recovering a contribution a contribution from directors for creditor losses arising from continued trading. The threat of this has been one of the factors that may have encouraged directors to choose closure rather than risk personal liability for pushing on in the hope of things improving. However, while this suspension is in place, action will not be able to be taken by liquidators and administrators against directors of companies that eventually become formally insolvent.
It is really important however that directors and owners of companies don’t treat this as some kind of bomb shelter because all of the other offences that make up the range of checks and balances on directors’ activities during a period of insolvency remain in place. Suspension of Wrongful Trading will not give directors much protection if the company was already insolvent beforehand or if the suspension leads them to act recklessly in the face of worsening circumstances. The residual provisions in the Insolvency Act 1986 relating to Misfeasance, Preferences and Transactions at an Undervalue remain and are arguably easier to enforce, as also is the Companies act requirement that directors must act in the best interests of the Company.
If anything, the suspension of Wrongful Trading introduces an increased degree of uncertainty for some directors of companies that may have been on the edge of insolvency at the outset of lockdown and the safest way of dealing with that is to take advice from the company’s usual financial advisors who may recommend a Licensed Insolvency Practitioner from whom they can obtain clarification and reassurance appropriate to their particular circumstances.
The moratorium has been introduced to give all companies in financial difficulty, including but not necessarily as a direct result of Covid-19, formal breathing space to pursue a formal rescue plan. The company will need to be able to demonstrate that it is taking formal advice from a Licensed Insolvency Practitioner and is actively engaged in pulling a rescue plan together. During the moratorium, legal action cannot be taken against a company without court approval. This and the following 3 additional measures are intended to support and encourage companies into taking appropriate advice and charting a positive strategy to avoid outcomes that result in closure of the business, significant redundancies, and unmitigated financial losses to creditors.
Ipso facto (termination) clauses
The Ipso Facto clauses in the new Bill are intended to prevent suppliers from stopping or threatening to stop supplying a business that is going through an insolvency or restructuring procedure. This doesn’t force them to supply at risk of not being paid in due course; there will have to be safeguards in place to ensure that continuing supplies can eventually be paid for but, one of the most significant obstacles to any business rescue is the difficulty in maintaining supplies and this should help. However, if the requirement causes hardship to a supplier’s business, they can be relieved of it if the court agree. Importantly. small company suppliers will be temporarily exempt from this requirement during the Covid-19 response situation.
Businesses that are otherwise viable but experiencing difficulty repaying debts will be able to restructure under a new procedure. This has some similarities with the existing procedure known as a Company Voluntary arrangement (CVA) and the courts will sanction use of the procedure in each case based on whether it is fair, equitable and in the interest of creditors. Although Creditors vote on the plan, the courts will also have the power to impose it.
Statutory demands and winding up petitions (two measures)
For the duration of the response to COVID-19, unpaid creditors are unable to issue valid Statutory Demands against companies and businesses. Similarly, Winding-up petitions will generally not be allowed to proceed although there have already been instances where the courts have made winding-up orders where it has been shown that the unpaid debt was consistent with a historic disregard for financial obligations or, more particularly, tax compliance.
However, the general purpose of the new measure is to encourage and permit companies the opportunity to come to pragmatic and fair agreements with creditors and alleviate the threat from unpaid debt due to the pandemic.
Annual General Meetings (AGMs)
With gatherings of multiple individuals not currently permitted, the Bill allows companies that must legally hold an AGM or GM to do so by other means – even if the company protocol does not normally allow this.
As you will know, Companies House has made changes to filing requirements during the COVID-19 emergency, including extending deadlines and therefore countering the threat of penalties for late submissions. More flexibility may be required, so the Bill gives the Secretary of State the power to implement further extensions.
These new measures are intended to provide businesses and the professionals advising them with a limited amount of wriggle room within which to work around the constraints of the existing system to rescue companies that would have been viable had it not been for the practical and financial consequences of the necessary response to the COVID-19 pandemic.
It is extremely important that directors don’t read these provisions as a green light to disregard the personal risks that may come with running a business in financial stress. It will be extremely difficult for many directors to maintain objectivity and rationalise the steps they need to take in the face of this pressure and now, more than ever, they will be wise to seek professional help and guidance.