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Emergency Changes to UK Insolvency Rules

Viable companies are experiencing unprecedented financial difficulties as a result of the continuing outbreak of COVID-19.

Following a number of government announcements over the past few weeks concerning measures to support businesses affected by the outbreak and resulting lockdown, on 28 March 2020, Business Secretary Alok Sharma announced emergency changes to the UK-wide insolvency regime to alleviate pressures on companies and directors, in a bid to support companies to “weather the storm”.

The measures expected to be introduced by emergency legislation after the Easter break are:

  • Suspension of the offence of wrongful trading for 3 months;
  • Introducing a short moratorium from creditor action;
  • Enabling companies to continue trading, and access essential supplies, during the moratorium; and
  • Introducing a new restructuring plan.

Suspension of the offence of wrongful trading

What are the current wrongful trading rules?

Wrongful trading provisions in section 214 of the Insolvency Act 1986 provide that directors can become personally liable if they knew, or they could reasonably have been expected to have known, that the company cannot avoid insolvency. They did not take all steps to minimise losses to the company’s creditors.

The consequences of a declaration under section 214 are potential:

  • disqualification from acting as a director for up to 15 years;
  • financial fines and penalties; and
  • unlimited personal liability for the losses sustained by creditors as a result of continued trading.

Crucially, the rule prioritises creditors’ interests, even where directors ultimate intention is to steer the company out of trouble.

What are the proposed changes?

The government has proposed a legislative suspension of section 214 of the 1986 Act with retrospective effect from 1 March 2020 for an initial period of three months.

What does this mean for businesses?

This temporary measure is intended to comfort company directors that efforts to keep business as usual – including taking advantage of the Coronavirus Business Interruption Loan Scheme – over the next three months will not fall foul of wrongful trading rules and that companies viable prior to the COVID-19 outbreak will continue to trade beyond these difficult times. This should alleviate anxieties amongst directors who have reportedly become concerned that continuing to employ, trade and incur emergency debt, whilst they may be unexpectedly technically insolvent, could have devastating consequences on them personally if they were to cease trading eventually.

Directors should be aware; however, that other duties and the potential to become personally liable continue under separate provisions within the 1986 Act despite the relaxation of wrongful trading laws. These provisions include fraudulent trading; misfeasance; and rules concerning transactions at

undervalue and preferences applicable to companies based in England and Wales, and gratuitous alienations and unfair preferences applicable to companies based in Scotland.

Other measures

Alok Sharma’s announcement also highlighted a number of proposed changes to the insolvency regime intended to provided “breathing space” to businesses, which we should expect to see enacted over the coming weeks. The government announced plans to introduce reforms to the insolvency law regime in August 2018, and it appears that the government intends to fast track those in light of current circumstances. The proposed changes are:

  • Introducing a short moratorium preventing creditors from taking enforcement action against companies who are in financial distress and seeking to rescue or restructure the business, including prevention from raising a winding-up petition.
  • To promote continued trading, and therefore survival of good businesses, during such moratorium, allowing companies to continue to access supplies (e.g. raw materials, etc.) in order that they can continue to trade, with a view to rescuing the business as a going concern.
  • Introducing a new restructuring plan which would bind creditors, including dissenting creditors via a ‘cross-class cram-down provision’ to the restructuring plan. This provides for an alternative to company voluntary arrangements and schemes of arrangement.

The proposed legislative changes are yet to be implemented. We will provide an update once Parliament has enacted those changes. This blog post was prepared on 8th April 2020. This is clearly a fast-moving field, and we are seeing updates to the governments’ policies on an almost daily basis. We will endeavour to update this blog when significant changes are announced. If you have questions regarding the changes, please do not hesitate to get in touch with a member of the Dispute Resolution Team.

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