Changes to Insolvency Legislation through COVID-19

At Simplyhealth, we work with a variety of businesses, from small and medium-sized enterprises, such as dental and veterinary practices, to large corporate partners. We understand the importance of keeping up to date with correct and relevant information and the value of guidance, support and advice. In collaboration with our legal partner, Knights PLC, we've put together a suite of business resources to help you through this challenging time.

What are the changes to Insolvency Legislation as a result of COVID-19?

Overview

• Insolvency rules relaxed.

• The overriding objective is to assist UK companies to keep trading while restructuring. The measures proposed to give this breathing space are set to include a suspension of the current wrongful trading provisions and a new moratorium for businesses undergoing a restructuring process.

• The intention of giving companies (that were viable before the COVID-19 outbreak) a greater chance of continuing to operate once the current crisis comes to an end. 

• The government hasn't confirmed a date the new measures will come into force however we understand the measures concerning wrongful trading are to be introduced temporarily and retrospectively from 1 March 2020 for an initial period of 3 months. 
  
  
• The new moratorium and the restructuring plan, of course, cannot be used until they have been brought into legislation. However, the relaxation of the wrongful trading provisions can be relied upon to some extent for present purposes.

Wrongful Trading

The Wrongful Trading provisions are contained within sections 214 and 246ZB of the Insolvency Act 1986. The rules apply once a director concludes, or ought to have concluded, that there was no reasonable prospect of the company avoiding liquidation or administration. There is no requirement of dishonestly or fraudulent intent.

•  If a director is found to have continued trading and did not minimise losses to creditors, then they can be held liable to disqualification under the Company Directors Disqualification Act 1986 (for a period between 2 and 15 years). 

•  Further to disqualification, the courts have the power to impose personal liability on directors, requiring them to contribute to the assets of the company, which will then be made available to the creditors.

• To avoid facing these severe consequences of disqualification and personal liability, directors must show that they took every reasonable step to minimise the loss to the creditors. These consequences are one of the key reasons that companies are put into liquidation or administration.

• The suspension of these rules will release directors of some of the pressures presented by COVID-19. It's clear the decision has been made in the hope that it will allow directors to keep their businesses alive and pay their employees and suppliers even in circumstances where there are fears of insolvency. 

Restructuring Moratorium

The proposed regime provides a Restructuring Moratorium that will be available to companies in financial distress, and that will need to undergo a financial rescue or restructuring process. 

• This will provide companies protection from creditor enforcement action being taken against them while considering options for rescue. The company will have breathing space to restore or seek new investment. During the moratorium period, creditors will not be able to put a company into administration.

• Also expected is the inclusion of a prohibition on suppliers enforcing termination clauses in contracts on the basis that the company has entered an insolvency process, or is subject to the new moratorium or restructuring plan. This prohibition will allow companies to continue trading and access raw materials and utilities.

• The Restructuring Moratorium is expected to be available for all businesses that were financially sound before the COVID-19 outbreak.

Continuing Obligations and Considerations

The Business Secretary has reiterated that "all of the other checks and balances that help directors fulfil their duties properly will remain in force".

Irrespective of the proposed regimes, it is imperative that companies and its directors continue to abide by other regulations that are unaffected by the government's proposals including those on fraudulent trading, transactions defrauding creditors and misfeasance. 

Directors Duties

• It remains vital for directors to continue to exercise reasonable care and skill in the management of company affairs and to have regard to all of their duties and obligations as directors.

• Directors must act in good faith and promote the success of a company for the benefit of the members as a whole when solvent and primarily in the interests of its creditors when insolvent.