On 28 March 2020, Business Secretary Alok Sharma announced new insolvency measures to help businesses pull through the coronavirus crisis.
The government has already taken unprecedented steps to support businesses financially, through income support schemes, packages for grants and loans, business rate holidays and VAT deferrals.
The focus has now turned to introducing measures to ease the burden of regulations on companies during these difficult times. One way in which the government aims to ease the burden is by improving the insolvency system to “give firms extra time and space to weather the storm and be ready when the crisis ends, whilst ensuring creditors get the best return possible in the circumstances”.
We have set out a summary of the measures announced by the Business Secretary below.
Suspension of wrongful trading provisions
There will be a temporary suspension of the wrongful trading provisions in the Insolvency Act 1986 to remove the threat of personal liability of directors during the pandemic. It is proposed that the suspension will take effect retrospectively from 1 March 2020 for three months.
Currently, it is a statutory offence for company directors to continue trading after a point where it is clear that the company is going to be insolvent. Directors have a duty to take reasonable steps to minimise potential loss to creditors, and can become personally liable for business debts if this duty is breached.
We welcome the suspension of this duty, which should give directors peace of mind and room to manoeuvre through these difficult times. It could be open to abuse, but the Business Secretary has stressed that all other checks and balances to ensure that directors fulfil their duties will however remain in force. Directors will need to continue to take care that their actions are not in breach of other duties, including fraudulent trading. There will hopefully be more clarity when the regulations are published.
We await further details to see how all of this will be addressed in practice. This area of law is quite complex, and if you have any concerns in regard to this in the meantime we would be happy to have a discussion with you.
Introduction of a temporary moratorium
A temporary moratorium will be introduced to allow companies undergoing rescue or restructuring to continue trading. This will give companies some much needed breathing space and allow them to continue to obtain supplies and raw materials, whilst considering options for rescue. The government hopes that this will allow businesses to emerge from the coronavirus pandemic intact and ready to “bounce back”.
Whilst very little information has been announced, we expect that the government will accelerate the implementation of reforms previously announced in 2018 to introduce a new insolvency restructuring process and moratorium in the UK.
The proposed process is similar to Chapter 11 of the US Bankruptcy Code, whereby an automatic stay comes into effect that prevents any enforcement action or legal proceedings against the business, whilst the board of directors continues to manage the business and formulate a plan for reorganisation.
One of the greatest implications of the proposed process is that creditors will be prohibited from enforcing termination clauses on the grounds of insolvency. Whilst the US provisions apply to all commercial contracts, it was proposed that the UK provisions would apply to supplier arrangements only.
It remains to be seen how closely the government will stick to the proposed reforms when implementing the emergency legislation.
What next?
At this stage, very little information has been published in relation to the new measures and how they will work in practice. The government has advised that the new measures will be introduced by emergency legislation at the earliest opportunity, but there is no further indication as to when this might be. Parliament is currently in recess and will return in late April. We will continue to check for updates and update our advice accordingly.
This note is based on information as at 30 March 2020 and will be updated as and when further information is provided.
Insight from Pamela Muir, Corporate,Insolvency, Restructuring Partner. For more information contact Pamela on 03330 430350 or email pmuir@thorntons-law.co.uk.
