COVID-19: UK insolvency reforms

The UK Government has announced it will fast-track reforms to the English insolvency regime to assist businesses which are suffering financially because of COVID-19 restrictions and to help support the directors of those businesses.

While detail in the announcement is limited, a number of these amendments derive from the Government's response to consultations from 2016 and 2018 reviewing the corporate insolvency framework (the Government Response). The assumption is that the reforms will largely mirror those proposed measures.

Wrongful trading

With retrospective effect from 1 March 2020 there will be a temporary suspension of the laws against "wrongful trading" by company directors.

Wrongful trading provisions can result in directors being personally liable for losses suffered by creditors of a company. This amendment will give directors additional comfort as they make tough choices around use of a company's finite resources.

This is a short-term measure which has arisen solely as a result of the COVID-19 crisis and the Government was clear that other checks and balances on directors' conduct will remain in force and the interests of creditors will remain relevant.

Restructuring plan

If modelled along the lines of the Government Response, the new form of restructuring plan will be similar to a scheme of arrangement and will be capable of binding both secured and unsecured creditors but with the important distinction that it will allow for cross class cram-down (meaning that classes of dissenting creditors can still be bound by the plan).

As with a scheme of arrangement, court involvement will be required and while this ensures proper scrutiny of the plan and protection of creditors' interests, it does mean that the new restructuring plan process will inevitably not be one that can be implemented quickly.

Moratorium

Perhaps of more immediate benefit to companies struggling with the financial ramifications of COVID-19 will be the introduction of a short moratorium which will be available outside of a formal insolvency process to facilitate a business rescue.

If reflective of the Government's position as outlined in the Government Response, this will be a stand-alone moratorium for an initial period of 28 days which can be obtained by filing documents at court (similar to the current out of court administration process).

Any company wishing to obtain the benefit of such a moratorium will require the involvement of an insolvency practitioner to act as "monitor" who must be satisfied that:

• the company can meet its obligations as they fall due, and
• a rescue is more likely than not.

One important issue that remains unclear is whether the moratorium process will be available to companies which are already technically insolvent. The Government Response indicated that a company would need to be solvent in order to access the moratorium. That requirement, may, however, limit the effectiveness and availability of the moratorium in the current crisis.

Continuation of supplies

The Government announcement indicated that there would be a suspension of contractual termination provisions on the ground of insolvency (or so called "ipso facto" clauses). These provisions, and their enforceability, divide opinion, although it appears that any amendment to the operation of these provisions will only apply to contracts for the supply of essential services and supplies rather than operating as a blanket restriction.

Going further

Further amendments proposed by various industry bodies such as those designed to limit a creditor's ability to petition for the liquidation of a company (which have been implemented in jurisdictions such as Australia) have not been mentioned by the Government to date. It is hoped that further amendments may follow.

Timing

The timeframe for implementing these legislative reforms will be critical. The Government indicated it would legislate at the "earliest opportunity" but this does not give much in the way of clarity. With every week (or indeed day) that passes, the ramifications for businesses will become more profound and if these measures are not brought into force in very short order, their benefit for many may soon be lost.