COVID-19: Proposed Changes to UK Insolvency Laws

Proposed changes

The new restructuring tools include:

• temporary suspension of wrongful trading provisions for company directors (to have retrospective effect from 1 March 2020);
• a moratorium for companies giving them breathing space from creditors seeking to enforce their debts, while they explore options to rescue or restructure; and
• a new restructuring plan mechanism, which would bind dissenting creditors.¹

Suspension of wrongful trading rules

Where a company has entered formal insolvent liquidation or administration, its directors can be held personally liable for wrongful trading where they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into an insolvent process, without taking all steps to minimise losses to creditors.²

The proposed suspension of wrongful trading provisions is intended to provide comfort to directors who may be reluctant to incur additional debt (including under government schemes) or who might otherwise file for insolvency, perhaps unnecessarily, as a result of issues related to COVID-19. The announcement follows broadly similar action taken or proposed by other countries, for example Germany, Spain, Austria, Italy and Australia. Sharma confirmed during Saturday’s briefing that all other statutory directors duties would remain in place (which would include the duty to have regard to the interests of creditors where insolvency is probable and other safeguards against abuse such as directors' disqualification proceedings).

New restructuring tools: moratorium; protection of supplies; restructuring plan

The press release also announced plans to implement the new insolvency framework on which it consulted in August 2018 (the 2018 Consultation), including a pre-insolvency moratorium for financially distressed, but ultimately viable companies, which would prevent creditors from taking any action for a specified period of time.³ The proposals in the 2018 Consultation were intended to be pre-insolvency tools, and it is not yet clear whether, in the current context, they will be extended to companies that are already insolvent on a cash flow or balance sheet basis.

Moratorium

If the proposals set out in the 2018 Consultation are followed, the moratorium mechanism may include certain of the features set out below.

Objective

• To prevent creditor enforcement action from being taken against a company while it considers options for rescue.

Eligibility

• Companies seeking a moratorium must not be insolvent.
• Companies must have sufficient funds to meet obligations as they fall due, including new obligations incurred in the moratorium.
• The prospect of rescue must be more likely than not.

Duration

• Initial period of 28 days, triggered by a court filing.
• An optional extension of 28 days with monitor consent.
• Further extension with majority creditor consent.

Insolvency Practitioner Monitor

• An insolvency practitioner shall be appointed as the authorised supervisor, or “monitor,” for the moratorium.
• The role of the monitor is to support the integrity of the moratorium process and ensure that creditor interests are protected.
• The powers of the monitor shall be limited, but include assessing eligibility conditions and sanctioning any disposal outside the normal course of business.

Protection of supplies

In order to promote the continuation of trading, the 2018 Consultation suggested that termination clauses permitting one party to bring a supply of goods and services contract to an end upon the formal insolvency of the other would not be exercisable during the period of the moratorium.

Restructuring plan

The 2018 Consultation also included a new restructuring process that would allow a company to bind all creditors, including junior classes of creditors even if they vote against the plan, through the use of a “cross-class cram down” provision. This would be an alternative restructuring route for distressed companies, in addition to, rather than in place of, company voluntary arrangements and schemes of arrangement.

Further details expected 

At the time of writing, legislation implementing the proposed changes has not yet been published. An updated briefing as to the details, including whether the regime as implemented has changed from the 2018 Consultation described above, will be published once the legislation is available. 

¹ UK Government, Press Release: Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19, 28 March 2020

² Section 214, Insolvency Act 1986

³ Department for Business, Energy and Industrial Strategy, Consultation on insolvency and corporate governance: government response, 26 August 2018