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Business, taken personally.

Covid-19 and its impact on restructuring and insolvency

Posted by Lee Bramley on 4th May 2020

The COVID-19 outbreak created uncertainty for all businesses – things like basic trading performance, the availability of capital and the effect of the Government’s response to the COVID-19 outbreak.

The Government was forced to take steps via the lockdown which had a directly harmful effect on the economy. They sought to counter that with a broad package of support including the CBILS facility, the furloughing scheme, VAT deferral etc.

The Department for Business, Energy & Industrial Strategy (BEIS) responded by focussing on keeping businesses outside of a formal insolvency process and placing an emphasis on being seen to support restructurings and rescues as businesses respond to exceptional conditions.

Back at the end of March, the Business Secretary announced the measures detailed below. A number of weeks have passed without further detail being provided beyond the announcement made by Alok Sharma. We will, however, continue to update on the progress of the measures in the coming weeks.

Wrongful Trading

With the uncertainty of the current times, wrongful trading provisions will be of particular concern to directors. Continuing to trade whilst failing to take steps to minimise loss to creditors once it is clear there is a prospect that insolvency will not be avoided means they could face personal liability.

It was announced that these provisions would be ‘temporarily suspended’ allowing directors to continue to trade businesses without the threat of personal liability. It is hoped the suspension of the provisions will avoid directors filing for insolvency prematurely and instead, allow them time to attempt to trade through the difficulties they currently face.

Initially, the suspension will last for 3 months and will apply retrospectively from 1 March 2020.

Restructuring and Moratoriums:

Changes to corporate insolvency laws and procedures have previously been consulted on and plans to introduce new restructuring procedures were announced in August 2018. However, the Business Secretary announced that the legislation would be expedited and would come before Parliament as soon as possible with provisions included to enable the changes to be extended where necessary.

The changes will see new tools including:

  • A moratorium for companies seeking to restructure or rescue;
  • Protection of supplies;
  • A new restructuring plan, binding creditors to that plan.

A moratorium is a mechanism by which a company is protected against creditor action. This is currently only available to those companies in administration or small companies involved in a company voluntary arrangement. To qualify as a small company, two of the following criteria must be met:

  • No more than 50 employees;
  • A turnover of not more than £10.2 million;
  • A balance sheet total of not more than 5.1 million.

The Business Secretary announced that the new measures would extend the availability of a moratorium to companies undergoing a financial rescue plan or restructure. It is currently unclear exactly who can benefit and for how long. Whilst the original plans suggested the moratorium would allow businesses up to 3 months of protection, this was reduced to 28 days but it is now hoped that, under the current circumstances, protection could be afforded for 3 months.

Ideally, the new provisions will also ensure that companies are able to access essential supplies such as utilities and IT. This would place a limit on the ability of the suppliers to rely on an insolvency event as a trigger for terminating contracts and essential supplies which could otherwise be terminal for any business.

So, what next? There will be no formal change in the position until the Insolvency Act, 1986 is amended. At the moment, none of the measures announced has been implemented.

In any event, the scale of the pandemic means it would be very difficult to criticise steps taken by a director in an attempt to ensure that his business survives.

Should you feel you need additional advice and guidance our commercial disputes team, with their knowledge in insolvency and restructuring, will be happy to help.

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