Coronavirus Update: Changes to Insolvency laws
On the 28 March 2020, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy announced temporary changes to the existing insolvency legislation in light of the Covid-19 emergency. A new Practice Direction is expected which should provide guidance and clarity. The proposed measures, welcomed by companies and the insolvency profession alike, will enable companies and directors additional ‘breathing space’ while undertaking restructuring efforts caused largely due to the widespread global economic impacts of the pandemic.
It has become increasingly clear over the last few weeks that a number of businesses would face certain insolvency following the unprecedented changes and restrictions to our way of life and the inability of business to operate either in part or in many cases, at all. It is clear that the Government is making significant attempts to ensure the survival of businesses to protect our economy and enable it to successfully recover once the country begins to move back toward normality (whenever that may be!).
While it is still early days and legislation has yet to be passed confirming the extent of the additional protections afforded, the Government has highlighted some key areas:
- A moratorium on companies, preventing creditorsfrom placing companies into administration whilst the company is undertaking re-structing efforts. At present, the length of the proposed moratorium remains uncertain; and
- Suspension of wrongful trading laws to enable businesses to continue to pay workers, suppliers and continue to purchase raw materials in circumstances where they are aware that the business may likely enter into liquidation.
It remains to be seen whether the moratorium will also apply to Qualifying Floating Charge Holders and no doubt the position will become clearer once the legislation has been passed.
The Government has indicated that the changes will be applied retrospectively from “at least the beginning of March”. The effects of these temporary changes will provide a welcome lifeline to businesses and to professionals who are engaged in re-structuring efforts.
Whilst it may seem that the rules are being relaxed for companies and directors in these unique and uncertain times, Mr Sharma has cautioned that all other legal checks and balances will remain in force “to ensure directors fulfil their duties properly”.
What does this mean for insolvency practice? In short, this temporary legislative change will have an immediate impact upon working practices. Advice to creditors may simply be, be patient and wait. The focus seems to be affording time to enable restructuring options to be fully explored.
Moreover, the need to caveat advice to directors with an immediate warning to cease trading to avoid wrongful trading will be, but potentially towards a final push to continue trading to facilitate growth to avoid insolvency without the fear of being held to account should the gamble not pay off. This is however a balancing act; the Insolvency Profession has highlighted concerns regarding potential abuses by directors as a result of any suspension of Wrongful Trading rules. It is hoped that the pending legislation and Practice Direction will take into account some of those concerns and balance those with the need to support business at this time.
Whilst the lasting effects of these temporary changes are largely unknown at this stage and we have yet to see the true extent of any legislative changes, this is a key historical moment in the way we approach Insolvency and restructuring during a time of unprecedented crisis.