Business Secretary, Alok Sharma, announced on 28 March proposed changes to the UK’s insolvency regime in response to the disruption caused by the Coronavirus (COVID-19) pandemic. Although details have still to be released, these changes will include:
- A moratorium for companies (and, presumably, limited liability partnerships) while they seek a rescue or restructure
- Enabling companies to continue to purchase essential supplies - including energy, raw materials and broadband - during the moratorium period
- Suspending wrongful trading provisions retrospectively for three months from 1 March 2020
- A new restructuring plan, binding on creditors
The purpose of these changes is to minimise the risk of companies having to enter formal insolvency as a result of the government-imposed restrictions placed on everyday life that have effectively closed many businesses over the past three weeks.
The Business Secretary explained that the proposals will include safeguards for suppliers and creditors to ensure that they are paid, presumably for debts incurred in the moratorium period.
This is a time-sensitive stay during which creditors will be unable to take enforcement action against a company or limited liability partnership. Enforcement action will presumably include petitioning for a winding-up, appointing Administrators, forfeiting leases, distraining over or repossessing assets. The company will then have a limited time to consider its options including restructure, refinance or otherwise.
The restructuring profession has long argued for a workable moratorium procedure and, in principle, this is a measure which we welcome.
The government has already made clear that the safeguarding of essential supplies will only be available to companies subject to the moratorium process. It is likely that the government will widen the definition of essential supplies, which is currently restricted to utilities.
This measure pierces the corporate veil in the event of a company director acting unreasonably by continuing to trade and obtain credit at a time when any reasonable person ought to have concluded that the company could not avoid insolvent liquidation. Under the current provisions if the deficiency to creditors increases from the date at which a reasonable person would have ceased to trade to the actual date of liquidation, the directors of the company may become personally liable for the increase (but not for the entire deficiency).
In suspending this provision, the government is acknowledging that many companies have become insolvent over the past few weeks - this is an attempt to enable boards to deal with their companies’ financial situation without fear of being personally liable if they do not cease trading immediately.
This measure is sensible and allows company directors to concentrate on their businesses without fear of having to make good a shortfall brought about by circumstances entirely outside of their control.
At present, directors of companies adversely affected by the pandemic have the following options:
- Seek further investment
- Enter into informal arrangements with their creditors
- Propose a Company Voluntary Arrangement
- Sell the business (probably by way of a pre-packaged Administration)
- Place the company into Liquidation
It is not yet clear what form a new restructuring plan will take and, again, we will provide an update as soon as further details are available.
Conclusion and next steps
We welcome this emergency legislation and believe it will significantly bolster the wider Coronavirus business support measures that have been recently implemented by the Chancellor. Many companies are now facing the real prospect of becoming insolvent in the forthcoming weeks because of the restrictions put in place to deal with the pandemic. Although many of the details are yet to emerge, it is encouraging to see the Government‘s commitment to save as many of those companies as possible and provide much needed support to the economy in such challenging times.
If you want help or advice on the options available to your business during this challenging time, please get in touch: