Covid-19 insolvency update


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Over the weekend the government announced it will amend insolvency law in an attempt to provide companies breathing space and keep trading (absolving directors of personal liability for wrongfully trading) whilst they explore rescue or restructuring options. 

This will include enabling companies to continue buying supplies, such as energy, raw materials and broad-band whilst they are attempting a rescue and, temporarily, suspending wrongful trading provisions retrospectively from 1 March 2020 for 3 months so that directors can keep distressed businesses operating without the threat of personal liability. 

The CBI welcomed the above announcement, recognising that headroom is required for businesses to utilise the government's C-19 related support packages, including last week's measure to grant a 3 month extension to the filing of accounts at Companies House. 

Under the plans, new restructuring tools will be introduced including:

  • A moratorium from creditors seeking to enforce debts for a period of time whilst they seek to restructure / rescue (in a similar way to the administration regime);
  • Protection of supplies to enable trading during the moratorium; and
  • A new restructuring plan binding upon creditors.

Winding Up Petitions adjourned for at least 12 weeks

As part of the government response to the crisis and in a further attempt to keep distressed businesses afloat, last week the Companies Court adjourned all winding up petitions for a period between 12 and 19 weeks.  It was held that these petitions could not be heard either in Court (for safety reasons) or remotely (due to logistics).  However, it also appears to be part of public policy as outlined over the weekend, to effectively stay contentious insolvency proceedings. 

Given the increasingly stringent measures being imposed by Government due to the C-19 pandemic, it appears very likely that the Court will adopt a similar approach to any petitions issued in the coming weeks, effectively postponing compulsory liquidations for the foreseeable.

In light of the above, creditors who were contemplating issuing a petition against a debtor should seek legal advice prior to doing so.   Creditors will understandably be frustrated at the suspension of what if a very powerful tool in a creditor's armoury, albeit one which must be used correctly and in the right circumstances.

HMRC preferential status

Some relative good news for trade creditors and asset based lenders is that the  reintroduction of HMRC's preferential creditor status which was due to come into force from 6 April 2020 (in respect of certain tax liabilities) has now been delayed until 1 December 2020, so currently HMRC still ranks as an unsecured creditor in any liquidation until that time. Preferential creditors are paid in priority to floating charge and unsecured creditors.

Wrongful trading provisions to be suspended for three months

The wrongful trading provisions are triggered when a company director knew, or ought to have concluded, that that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Under Section 214 of the Insolvency Act 1986, a company director can be personally liable to pay compensation in these circumstances – a significant risk for any director who has to balance whether a company can continue to trade, or enter into a formal insolvency process (such as administration or liquidation).

Whilst the specific legislation has yet to be formalised, the Government has announced that the suspension of the wrongful trading provisions will be retrospective from 1 March 2020, until 1 June 2020. This will apply to all companies in all sectors, regardless of whether Covid-19 has been the cause (or catalyst) of any financial decline.

However, the suspension does not provide company directors with a shield to trade as they wish. On the contrary, company directors in an insolvency situation need to remain mindful of their duties to act primarily in the interest of creditors (rather than the company and its shareholders) and to ensure they avoid certain transactions (which could be viewed as putting assets out of the reach of creditors, transactions at an undervalue, or preferences) which may still lead to a claim by a liquidator in the future.

Summary

The practical consequence of wrongful trading laws being relaxed, whilst welcomed, may not be of much effect when considering that these types of claims are rarely pursued against directors by insolvency practitioners – they are difficult to bring from an evidential perspective. From a debtor viewpoint, these developments provide a reprieve (temporary at least) and with it the opportunity to potentially engage with creditors if a viable rescue package can be proposed. This may be helpful to a company in financial distress which can now benefit from any government funding assistance which is being made available. 

The success of the coronavirus business interruption loan scheme is also predicated on Banks releasing the funds.   If banks are requiring personal guarantees to accompany new funding, directors will not be reassured by the relaxation of the wrongful trading regime if they are still facing guarantee liability.     

It is also expected that voluntary liquidations and administrations will increase significantly in the coming months, with businesses already under extreme pressure across retail, hospitality and aviation sectors.  Insolvency levels were significantly increasing before this crisis in any event.  Many still face being taken over at depressed prices as part of a restructure or, at worst, closure.  Directors should seek specialist legal and accountancy advice at an early juncture, both in respect of their individual duties and to explore how the business could be saved.

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