Covid-19 insolvency update: current environment
Updated guidance on insolvency law.
As mentioned in our update dated (30/03/20) the UK government has announced amendments to certain aspects of insolvency law, designed to enable businesses which have been adversely affected by the coronavirus outbreak to continue trading while they explore options for rescue or to restructure.
In response to the warning from the Office for Budget Responsibility that the economy could shrink by up to 35% if the current lockdown restrictions remain in force until June, the Government has reiterated that it will continue do it all can to support the economy and keep people employed. Whilst we can expect further measures/assistance to be announced in the coming days it remains to be seen whether this will address the challenges being faced by the significant number of businesses in distress across many sectors.
Business failures are increasing and cash flow problems will inevitably arise in July, August and September when the furlough scheme stops and as business grapples with the scale of the lock down and its consequences.
Proposed New Moratorium - not yet in force
The Government is also expecting to legislate for a new moratorium of up to 90 days. This would grant all companies (not simply those facing Covid-19-related liquidity issues) time and “breathing space” to seek a rescue or to restructure and prevent creditors from enforcing debts during that period without necessarily entering into a formal insolvency process. There will also be protection of companies’ access to supplies and the ability to access new funding during the moratorium to facilitate continued trading and job protection.
This is the latest step on government plans for new restructuring procedures which were the subject of a consultation in 2016 before being refined and announced as prospective reforms in August 2018. Although the current crisis appears to be a catalyst for getting the reforms onto the statute book, it has not yet been clarified when the new moratorium will come into force and it is also unclear as to the extent the law will differ from the previous proposals. This includes uncertainty over whether the moratorium will be available to companies that are already insolvent, as opposed to the original proposal that they are solvent but are facing issues that are likely to lead to insolvency and which could be resolved through a restructuring which is likely to be deliverable. In order to prevent companies from abusing the process, there ought to be a requirement that the company should be capable of paying any debts which arise during the moratorium period. However, such a similar requirement in the current environment might severely limit the utility of the tool to companies facing serious cashflow problems as a result of the Covid-19 lockdown.
The Government also stated previously that the measures will protect companies’ supplies to enable them to continue trading during the moratorium. It is not yet certain whether the changes would include a prohibition preventing suppliers from enforcing certain contractual termination clauses (ipso facto or termination for insolvency clauses) during the moratorium. Whilst landlords have long been prevented from terminating "supply" under the Administration moratorium, such an extension to trade suppliers would be completely new.
Another issue, and particular concern for banks and lenders, is how the moratorium would be regulated to prevent abuse and how existing secured lenders will be protected should companies be able to obtain additional funding during the moratorium.
In the current circumstances, through speaking with clients and insolvency practitioners, it appears that many creditors are choosing to reserve but not to enforce their rights against companies specifically affected by Covid-19, considering both the risk of reputational damage and the possibility that recoveries from enforcement action are likely to be severely reduced whilst the economy is frozen and asset values depressed. Companies might also find lenders willing to renegotiate existing debt packages during the crisis in light of other Government measures and guidance.
The Insolvency Court
Against this backdrop the Court has taken steps to ensure that winding up petitions can still be pursued by creditors in accordance with emergency procedures for the management of insolvency cases. Under the new Temporary Insolvency Practice Direction, all winding up petitions due to have been heard before 21 April 2020 are adjourned and relisted into bulk remote hearings to be conducted via video conference.
Cases are already being relisted and heard in this manner. Both creditors and debtors should note that, for the time being at least, petitions can still be presented and will be heard by the Court, albeit subject to inevitable delays (even for urgent cases). Petitions will still be published in The Gazette, and with it the risk of bank accounts being frozen which can be terminal for a business at any time, let alone during this crisis. Any recipient of a petition, or even a threat from a creditor to present the same, should seek urgent legal advice in relation to the petition but also the potential applicability of new insolvency protection.
While the previous announcement sends positive signals to directors of businesses under immense pressure due to the Covid-19 outbreak, we still await Government detail, particularly with regard to the proposed moratorium (and restructuring plan) proposals.
We expect new information regarding the above issues this week and will publish further updates as this becomes available.