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COVID-19: Changes to UK insolvency laws

03.04.2020 Business Recovery, Restructuring & Insolvency

Alex Rogan

Alex Rogan Partner

Julie Killip

Julie Killip Partner

Over the past couple of months, the world has seen an unprecedented negative economic shock as a result of measures being implemented across the globe to save lives in the face of Covid-19. Governments across the globe are rushing to make arrangements, including temporary amendments to insolvency laws, to protect livelihoods and help businesses survive Covid-19 (see our update in relation to changes that have been implemented in Germany).

The UK government has now followed suit and, as referenced in our update at the beginning of the week on recent government support measures, the government announced on Saturday 28 March that it too would be making changes to our restructuring and insolvency laws. The stated aim of these amendments are to “reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control” and “to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency, without the threat of personal liability should the company ultimately fall into insolvency”. 

The proposed changes also involve implementing proposals that the government previously proposed in August 2018. These further changes will serve as a very useful addition to the restructuring toolkit which will be required to help businesses through this crisis.  

What amendments to insolvency laws has the government proposed?

The key insolvency related Covid-19 measure that the government has announced is a temporary suspension of wrongful trading provisions, to be applied retrospectively from 1 March 2020 for three months (subject to a possible extension),  so that company directors can keep their businesses going without the threat of personal liability for wrongful trading. Wrongful trading liability was covered in our update of last week. In brief, it arises where creditors incur losses as a result of a company continuing to trade when the directors knew, or ought reasonably to have known, that there was no reasonable prospect of avoiding insolvent liquidation and they failed to take every step to minimise losses to creditors. 

This proposal will significantly help directors navigate the zone of insolvency which Covid-19 has created for companies across the country and help directors with the difficult decision to continue to trade and access the necessary liquidity that the government has recently made available. 

What protections are available for creditors?

Existing laws for fraudulent trading, director misfeasance, transactions defrauding creditors and the threat of director disqualification, amongst others, will remain in place to act as a deterrent against director misconduct and protect creditors’ interests. Directors’ duties to consider the interests of creditors where the company is trading in the zone of insolvency may also remain in place. 

What further amendments to insolvency laws have been proposed?

The announcement also references bringing forward into legislation, certain changes to UK insolvency laws which the government previously proposed in August 2018 but whose implementation stalled as a result of Brexit: 

  1. A new restructuring moratorium for viable companies undergoing a restructuring process to allow them time to negotiate an out-of-court restructuring whilst they are still able to pay their debts as they fall due;
  2. Preservation of a company's ability to continue to access essential supplies such as energy, raw materials or broadband while it undergoes a restructuring; and 
  3. A restructuring "plan" which, subject to certain protections akin to the absolute priority rule under the US Chapter 11, will bind all creditor classes whether or not they voted in favour of the plan. This “cross-class cram down” mechanic will provide for a more streamlined restructuring process and reduce the scope for out-of-the money creditor hold-out strategies. 

These changes are very welcome and will ensure that the UK remains the leading jurisdiction for cross-border restructuring by maintaining a best in class restructuring tool kit. 

Are these measures sufficient?

It is a difficult balance to strike between saving businesses and protecting creditors’ interests, but as the Chancellor recently said this is not a time to allow the perfect to be the enemy of the good. There is scant detail available at the moment on all of the proposed measures beyond a short announcement from the government (click here to view). As always the devil will be in the detail, but it would appear that there is room for further support including an extension of the scope of the moratorium to protect insolvent businesses which are no longer able to pay their debt as they fall due as a result of Covid-19 and extending the time frame in which debtors have to respond to statutory demands from 21 days to better protect companies against hostile creditor action in the immediate midst of this crisis. 

What is the timing for these amendments to be implemented?

In terms of timings, the announcement states that these measures will be introduced in Parliament at the earliest opportunity. This will likely be in the week of 21 April provided Parliament is able to return from recess to pass the necessary legislation. We are carefully monitoring the progress of such implementation, so watch this space! 

This Q&A does not constitute legal advice. Should you have any queries, or you would like our assistance in considering the issues raised in this Q&A then please do not hesitate to contact the authors of this article or your usual contact at Ince. Our team stands ready to assist.

Article authors:

Alex Rogan Julie Killip