Changes to UK insolvency law to protect companies impacted by COVID-19

1. Introduction

This note provides a brief summary of the measures announced on 28 March 2020 by the Rt Hon Alok Sharma MP (Secretary of State for Business, Energy and Industrial Strategy (“BEIS”)), to support businesses following the coronavirus outbreak – see link.

2. Wrongful trading

2.1 Directors’ liability for wrongful trading¹ arises if the directors of a company allow it to continue to trade at a point when they “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”. Directors must take every step available to them from this point to minimise potential loss to creditors. If proved, a director may be held personally liable to make such contribution (if any) to the company’s assets as the Court thinks proper.

2.2 However, the Government has announced its intention to temporarily suspend the wrongful trading provisions to persons who are directors of companies. The suspension is to be applied retrospectively from 1 March 2020.

2.3 To counter any continuing misconduct, the Government has stated that the existing laws for fraudulent trading and disqualification for unfit directors will continue to act as “an effective deterrent”.

3. New “restructuring tools”

3.1 The Government has also announced the implementation of new restructuring tools, following on from BEIS’ consultation on insolvency and corporate governance in March – August 2018 – see link. The measures proposed include:

• a moratorium for companies, given them breathing space from creditors seeking to enforce their debts whilst the company seeks a rescue or restructuring;
• protection of supplies to enable companies to continue trading during the course of the moratorium; and
• a new restructuring plan, which will bind creditors to that plan.

3.2 To safeguard creditors and suppliers, it is intended that the proposals will include measures to ensure they are paid whilst a solution is sought.

4. Timing

4.1 Legislation to introduce the changes outlined above will be laid before Parliament “at the earliest opportunity”. The Government has noted that they will include provisions to enable the changes to be extended if necessary.

5. Comment

5.1 We understand that the Business Secretary, having only recently been appointed to BEIS on 13 February 2020, has been consulting with the Insolvency Service, the Insolvency Lawyers’ Association and the City of London Law Society on the proposals. They have generally been welcomed by the industry.

5.2 Whilst the measures will no doubt provide comfort to companies and their directors (particularly SMEs), the devil will be in the detail as to whether the changes go far enough in this uncertain time. For example:

• further details of the qualification requirements – including whether companies that are already deemed to be insolvent will meet the criteria;
• whether the Government will also extend the proposed suspension on wrongful trading to the provisions on misfeasance²;
• whether the suspension on the wrongful trading provisions will also extend to former directors of the company;
• how the proposals will interplay with other punitive actions which will continue, such as fraudulent trading and director disqualification (and whether this is sufficient to prevent abuse);
• specific details of when the measures will be introduced, noting that the House of Commons is not due to return from their Easter recess until 21 April 2020; and
• how long the measurers are intended to be in place until.

5.3 Some of these concerns have been flagged by the industry trade body R3 – see link.

6. “Light touch” administrations

6.1 The primary objective of administration is the rescue of the company. Accordingly, the administration process could be viewed as an alternative compared to the other formal restructuring tools proposed, particularly in this challenging period.

6.2 For example, a “light-touch” administration proved to be a workable solution in the Metronet and Railtrack administrations of the early 2000s. In those cases, the directors of the companies remained in office making key decisions, with only an oversight or “light-touch” role for the administrators. Using this approach, companies could continue to trade through the difficult periods ahead in a nimble and flexible way.

For further information on these measures, please contact a member of the Restructuring & Special Situations team.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.

¹ Wrongful trading provisions can be found in sections 214 and 246ZB of the Insolvency Act 1986.
² Misfeasance provisions can be found in section 212 of the Insolvency Act 1986.