Insolvency Laws and Coronavirus (COVID-19): Government Response

On 28 March 2020, the Business Secretary, Alok Sharma, announced new insolvency measures to support companies under pressure as a result of the COVID-19 outbreak. In summary, the government is due to: (i) implement the landmark changes to the corporate insolvency regime that were announced in August 2018 (as discussed in Weil’s European Restructuring Watch update on 7 September 2018); and (ii) temporarily and retrospectively suspend wrongful trading provisions for three months.

Proposed Changes to the Corporate Insolvency Regime

On 28 August 2018, BEIS announced that it would, following consultation, make significant changes to the UK’s insolvency framework (as set out in Weil’s European Restructuring Watch update on 7 September 2018). The new insolvency measures announced by the Business Secretary on 28 March 2020 will now implement those changes, which include:

  • A moratorium for companies from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure.
  • Protection of supplies to enable companies to continue trading during the moratorium. The new insolvency measures will enable companies to continue to buy much needed supplies (such as energy, raw materials or broadband) while attempting a rescue. These measures should also provide breathing space to companies so that they can keep their businesses operating and their workers in employment.
  • A new restructuring plan, with Chapter 11 style cross-class cram-down rules.

The new insolvency measures will include key safeguards for creditors and suppliers to ensure that they are paid while a solution is being sought.

Suspension of Wrongful Trading Provisions

Under current insolvency legislation, directors of limited liability companies can become personally liable for company debts if they continue to trade after the point at which they knew (or ought to have known) that the company could not avoid an insolvent administration or liquidation.

The government intends to suspend these ‘wrongful trading’ provisions for a three month period starting from 1 March 2020.

It should be noted that the position regarding other directors’ duties and fraudulent trading is unchanged.

Timing

The Insolvency Service has stated that the “legislation to introduce these changes will be introduced in Parliament at the earliest opportunity. Provisions will be included to enable the changes to be extended if necessary”. We note that Parliament is currently in recess until 21 April 2020.

Additional Measures

The above measures are in addition to the measures already announced by the government to support businesses, which include:

  • A 3 month relief from forfeiture for commercial tenants.
  • A Coronavirus Job Retention Scheme.
  • Deferral of VAT and Income Tax payments.
  • A Statutory Sick Pay relief package for small and medium sized businesses (SMEs).
  • A 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England.
  • Small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief.
  • Grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000.
  • The Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank.
  • A new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge COVID-19 disruption to their cash flows through loans.
  • The HMRC Time to Pay Scheme.