COVID-19: Government announces insolvency law changes to give directors breathing space

Does the 3-month suspension of wrongful trading provisions, along with other measures, go far enough to enable businesses to weather the COVID-19 storm?

30 March 2020

The government has responded to intense pressure from the restructuring and insolvency community by announcing measures to 'protect companies hit by COVID-19'. Insolvency law will be amended 'to give companies breathing space and keep trading while they explore options for rescue'. In this article, we summarise the key measures and consider whether they go far enough to realistically provide management boards with the necessary protection.

The government’s proposed legislative changes

Whilst we await full details of the proposed measures, the press release issued on Saturday confirms the following:

  • Companies will be able to buy much-needed supplies, such as energy, raw materials or broadband, while attempting a rescue;
  • The wrongful trading provisions in the Insolvency Act 1986 will be temporarily suspended for 3 months retrospectively from 1 March 2020;
  • Those companies required by law to hold Annual General Meetings (AGMs) will temporarily be extended greater flexibilities, including holding AGMs online or postponing meetings (this measure follows an announcement earlier in the week to grant companies affected by COVID-19 an automatic 3-month extension to file accounts following a fast-track online service); and
  • The previously consulted on insolvency and corporate governance reforms will be implemented.

Suspension of wrongful trading provisions

In our article published on 23 March 2020, we outlined the key considerations and practical points for directors to consider as part of the effective management of their duties: cash flow forecasting; stakeholder engagement; professional advice; deliverability of plan; and create a paper trail. These are all still critical.

A fundamental concept in insolvency situations is the potential personal liability arising from wrongful trading. The careful balancing act of continuing to trade whilst taking every step to minimise loss to creditors is always difficult for directors to manage. Given the current global economic uncertainty, our clients have found this balancing act particularly challenging over the last few weeks. Likewise, filing for administration in the current climate is likely to be value destructive given the ongoing market uncertainty. We therefore welcome the temporary suspension of wrongful trading provisions, however, we query whether 3 months is long enough, noting that Australia has introduced a 6-month suspension.

Insolvency and governance reforms

In our article published on 19 September 2018, we commented on some of the key legislative changes planned by government relating to insolvency and corporate governance. These reforms will push us towards a much more debtor friendly market, which is consistent with changes that are being made to insolvency laws in the rest of Europe. A prohibition on ipso facto clauses, a pre-insolvency moratorium and a new restructuring plan (similar to the existing scheme of arrangement but with a cross-class cram down mechanism (similar to that in a Chapter 11 in the US)) were generally well-received in the restructuring market.

The original reforms stated that the new-style moratorium will not be available if a company is already 'insolvent' in order to 'encourage earlier action on the part of the company’s directors'. In the current climate, we query:

  • How many companies are already 'insolvent'?
  • Will companies be able to access sufficient short term liquidity to demonstrate solvency in order to benefit from the new moratorium?

We wait to see how lenders and investors react to the implementation of the new reforms and whether these changes are enough to avoid a number of companies still, ultimately, needing to file for formal insolvency.

How can Burges Salmon help?

We welcome Saturday’s announcement and look forward to reviewing the detail behind the government’s press release. Our Corporate Restructuring and Insolvency team works with stakeholders of all kinds. If you would like to discuss how these measures may affect your business, please contact Andrew Eaton or any member of our team.

Key contact

Andrew Eaton

Andrew Eaton Partner

  • Head of Corporate Restructuring and Insolvency
  • Banking
  • Corporate

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