On 28 March 2020 the Secretary of State for BEIS, Alok Sharma, announced that changes would be made to the UK insolvency laws to help companies "…emerge intact the other side of the COVID-19 pandemic…to give them extra time and space to weather the storm and be ready when the crisis ends whilst ensuring creditors get the best returns possible in the circumstances".
The proposed changes, extracted from the general statements made in the press conference and subsequent press release, include the following:
- Wrongful trading
- A temporary suspension of the wrongful trading provisions for directors, to remove the threat of personal liability during the pandemic. The suspension will have retrospective effect from 1 March 2020. However, the announcement made it clear that "all other checks and balances which help to ensure directors fulfil their duties properly will remain in place". Exactly what this means in practice will depend upon the way the suspension is worded in the amending legislation.
- The Insolvency Act 1986 currently provides that the court can order a director to contribute to a company's assets if he or she allowed the company to continue trading after the point at which he or she knew or ought to have concluded that there was no reasonable prospect that the company could avoid liquidation or administration with insufficient assets to pay its liabilities in full without having taken every step to minimise potential losses to creditors.
- The significant uncertainties presented by the COVID-19 pandemic have made many company directors very concerned that if they allow their company to keep trading they will end up personally liable for some or all of its debts. For that reason the temporary suspension of wrongful trading ought to be welcome. If it is clearly implemented it should reduce the pressure many directors may feel they are now under to put a company into administration prematurely.
- Moratorium: a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
- Protection of supplies: provisions which will ensure that during the moratorium companies which are undergoing a restructuring will continue to receive supplies and raw materials to enable them to continue trading; and
- Restructuring plan: a new restructuring plan which will bind creditors.
The press release states that "…the proposals will include key safeguards for creditors and suppliers to ensure they are paid while a solution is sought." Again we will need to assess the drafting to see what this means in practice.
There was very little detail about the proposals in either the business secretary's speech or the subsequent press release on the Government website, although the proposals for a moratorium, the protection of supplies and a restructuring plan appear to reflect the proposals made by the UK Government in 2016. Legislation will be introduced "at the earliest opportunity". As Parliament is now in recess until 21 April 2020, it remains to be seen whether the proposals will be given the careful consideration necessary to ensure that they are workable in practice and that "hard cases do not make bad law".
The City of London Law Society Insolvency Law Sub Committee and Insolvency Lawyers Association have also published a paper emphasising the usefulness and flexibility of the existing administration regime. Some of the points made are as follows:
- Although often seen as an expensive quasi-liquidation process, the principal objective of administration is the survival of the company as a going concern. That objective is more achievable where the company is suffering from a short-term liquidity issue rather than a longer term capital problem.
- Administrators can leave existing management in control of the day to day running of a company. That might be appropriate where the company's problems result from exceptional, external circumstances such as the present COVID-19 pandemic. It would also reduce the costs of the administration.
- Administrators can work within the administration moratorium with management to determine which payments should be made and which deferred.
- Creditors may be more willing to lend to a company in administration but under the day to day control of existing management as any new lending would rank as an administration expense payable ahead of the administrator's remuneration and the unsecured creditors.
This is a rapidly evolving area and we shall provide further briefings as and when the substance of the new proposals is clearer.