The UK government has announced changes to insolvency law with the Corporate Insolvency and Governance Act 2020, which is designed to protect businesses affected by Covid-19.
Whilst embracing the essence of fairness, the legislation also creates a platform for businesses that were struggling pre-Covid 19 to exploit the all-embracing comfort blanket that has been temporarily wrapped around industry. For otherwise viable businesses that have encountered temporary cash flow difficulties, forbearance, tolerance and understanding are the watch words here, and these changes will be welcomed.
It nevertheless lays down the gauntlet to businesses and their lawyers to be proactive, resourceful and innovative in their case preparation and presentation, to ‘slap down’ exploitation by serial debtors and failing businesses. Only time will tell whether the right overall balance has been struck.
A new standalone moratorium option
Included in the changes is a new standalone moratorium option for companies in financial difficulty. The new rules give businesses a minimum of 20 days of protection from certain creditor actions, with an insolvency practitioner acting in the role of monitor.
The moratorium will only be available to companies that are viable, and that the monitor considers can be rescued as a going concern. This requirement will, we believe, restrict the use of the moratorium in practice and both the company and any prospective monitor will need to consider carefully the strategy and likelihood of achieving this objective.
The company’s directors remain in charge of the business, and are able to extend the moratorium period by a further 20 days if, after day 15 of the initial period, they still need time to formulate a turnaround plan, without the approval of creditors. Any extension beyond 40 days requires creditor approval. The moratorium can be extended up to a year with creditor support, which means it could act as a vital lifeline for businesses that are struggling due to the Covid-19 crisis. The moratorium puts the focus on company recovery rather than asset realisation.
In addition to the moratorium, the Act also introduces temporary measures until 30 September 2020 to ease pressure on businesses as they try to find a path through lockdown, which our Co-founder Nick Harvey has outlined below.
Prohibition on the presentation of winding up petitions
The Act prevents the presentation of a winding up petition by a creditor on the grounds of inability to pay debts between 27 April and 30 September 2020, or where the demand was made during the period 1 March to 30 September 2020.
The temporary prohibition will not apply where the creditor has reasonable grounds for believing that the Coronavirus outbreak has not had a financial effect on the company, or that the company would still have been in financial difficulty even if the coronavirus had not had any effect.
This is the area which will prove to be a keen battle ground and lawyers will earn their crust. Businesses should proactively manage their debtor ledgers, and build the pre-Covid 19 narrative in readiness for enforcement action where appropriate.
Effective from 1 March until 30 September 2020, the ‘relaxation’ on wrongful trading provisions seeks to remove the threat of directors incurring personal liability for ‘trading while insolvent’ during the pandemic.
The need for this provision is questionable – it is unlikely that a liquidator would have brought a claim against otherwise reasonable directors who tried to continue trading during the period that coincided with the peak of the pandemic in the UK.
This relaxation of the wrongful trading provisions should not to be treated as carte blanche to carry on business recklessly. Directors should remain diligent about their conduct and take professional advice where appropriate as other legal risks remain in relation to that period, for example in relation to misfeasance, preferences and transactions at undervalue. Disqualification remains a risk for directors in cases of misconduct.
A restriction on suppliers terminating supply contracts where a company has entered an insolvency or restructuring procedure, or obtains a moratorium. The company’s suppliers will not be able to rely on contractual terms to stop supplying, or vary the contract terms with the troubled company (e.g. by increasing prices).
The customer is required to pay for any ongoing supplies while it is in the insolvency process, but is not required to pay amounts due for past supplies while it is arranging its rescue plan.
There are, however safeguards for suppliers if continuing supplies causes hardship to their business. Businesses should proactively seek advice to protect themselves and mitigate any risk or damage that delayed payment may cause.
This new procedure will be modelled on the existing English schemes of arrangement, but with the ability for a company to bind all creditors (including secured creditors) through the use of a cross-creditor class cram-down provision. This provision is dependant on it being sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure. The plan will enable complex debt arrangements to be restructured, and will support the injection of new rescue finance.
In practice, this new restructuring plan will most likely comprise a number of costly and time consuming court applications and hearings. As such, it is likely to be a process that is expensive to implement and one that may require a significant period of time from commencement to implementation. We therefore expect this new procedure may in real terms prove unsuitable for most SMEs.
The Government has had to move swiftly to introduce a safety net of protective measures. As always, balance and perspective needs to be maintained in the implementation, use and oversight of them if rights are to be protected and exploitation restricted.
If your business is likely to be affected by any of the changes to insolvency law, or if you need some advice on tackling a commercial dispute or late payment, please get in touch with us or one of our partner firms.
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