The Government recently announced that it plans to introduce emergency changes to current UK insolvency law to ease the pressure on businesses (and their directors) struggling as a result of the coronavirus pandemic.
The Business Secretary said that the measures will be implemented ‘at the earliest opportunity’, although with Parliament not scheduled to return from recess until 21 April 2020 we may see some delay before the measures become law.
As there is no proposed legislation as yet, we must examine both the contents of the Business Secretary’s statement and the follow up BEIS press release to try to glean further detail. We do have some idea of the intended direction of travel as the Government has been proposing changes to the UK’s restructuring regime since the summer of 2018. The intention appears to be to bring the proposed changes into force, albeit slightly quicker than originally intended. These are incredibly uncertain times both for businesses and restructuring professionals alike.
Suspension of wrongful trading
The proposed measure which has created the most commentary is the Government’s proposed temporary suspension of the wrongful trading legislation. This legislation can impose personal liability on directors who permit a company to continue trading to the detriment of its creditors at a time when there was no reasonable prospect of the company avoiding terminal insolvency.
It is often this potential personal liability that occupies the thoughts of directors, who might otherwise be focused on the survival of the business, and pushes them into seeking the protection of administration – something that the Government wants to prevent.
The Government has stated that the rules are to be suspended retrospectively from 1 March 2020. Clearly, the intention is to try to slow down the rush to administration whilst the Government lines-up its complimentary Covid-19 business survival measures (the “furlough” scheme for employers and Government backed loans for businesses).
The suspension of wrongful trading has been welcomed by business and most elements of the legal community. However, the initial reaction of the trade association for the UK’s insolvency and restructuring professionals, R3, has not been as supportive. The R3 fears that a blanket suspension could “risk abuse” and it is interesting that changes to wrongful trading appeared to be an area that the Government had moved away from as part of its intended changes to UK insolvency law. However, the Government obviously considers that that the stress that coronavirus has placed on the UK economy requires drastic measures. There are no proposed changes to fraudulent trading or other misconduct offences and it appears to be the case that the Government hopes that the threat of these offences will be sufficient to keep directors focused on the interests of creditors.
Whilst we await sight of the legislation (and some idea of when it might come into force), it is imperative that directors remain mindful of all their statutory duties, in particular their duty to act in the interests of creditors when there is a risk of insolvency – i.e. make sure they are treating creditors fairly. In particular, directors of companies who are in financial trouble (of which there will be many) should meet virtually with increased frequency, ensure that they are provided with, and are considering, up-to-date information on the company’s cash flow and liabilities and take advice from a restructuring professional (a solicitor or insolvency practitioner).
Other (at the moment less contentious) measures announced by the Business Secretary included:
- A plan to provide breathing space to companies in financial difficult – It looks as though the Government intends to introduce a pre-insolvency moratorium to provide some breathing space to companies in the process of being rescued or restructured.
If the pre-insolvency moratorium operates in the same manner as the moratorium in administration, it will restrain the ability of creditors to bring claims or present winding up petitions against companies in difficulty who have sought the protection of the moratorium.
If introduced in the manner suggested by the Government’s 2018 proposals then the moratorium will last for 28 days, with possible extensions available if certain conditions are met and would be supervised by an insolvency practitioner (although the directors will remain in control of the company).
- Measures aimed at protecting certainty of supply – The Government is keen to ensure that companies that are in the process of being rescued are not plunged into further difficulty by trading partners withdrawing supply. Measures like this already form part of the UK insolvency regime to some extent and prevent utility suppliers from turning off critical supply to insolvent business.
We anticipate that these measures may include restrictions on a supplier enforcing a contractual termination right operable on the insolvency of its customer (although the right to terminate for general breach of contract, and other rights, will continue).
- Potentially a new binding restructuring tool – If implemented in-line with the 2018 proposals, this tool would be utilised to bind all of a company’s creditors to a proposed restructuring plan. Again, the Government has yet to provide details as to how the tool will operate in practice.
As the details of the new plans remain to be disclosed it is imperative that directors continue to exercise caution as regards their legal duties during this unprecedented and economically uncertain time. The Bristows team are here to help should you have any questions on this article or your specific circumstances.