Government changes to insolvency law not as clear-cut as they seem
- AuthorTim Francis
Domestic business has already been severely impacted by the spread of the Coronavirus. With ministers announcing that restrictive ‘lockdown’ measures may well persist for up to six months, the government has been forced to consider unprecedented legislative amendments and support packages to aid businesses in their survival.
We heard last week that winding-up petitions in the High Court have been adjourned to dates 12-19 weeks in the future, the judiciary having decided that it would be impossible to deal with this extensive case-list remotely. However, it appears that far more significant change may well be on the horizon. Over the weekend, Business Secretary Alok Sharma announced plans for sweeping reforms to domestic insolvency law.
Specific detail of these changes is yet to be released, and, doubtless, the devil will be in the detail. However, Mr. Sharma did expand on a couple of amendments somewhat mirroring those made in comparable European jurisdictions. The following will likely see their inclusion in a bill being driven through parliament over the coming week:
Suspension of wrongful trading
With a view to encouraging continuing enterprise and alleviating director concerns, the government has announced that enforcement of wrongful trading will be suspended for, at the very least, the next three months. The provision, which creates personal liability against directors where a company continues to trade in knowledge of potential insolvency, will have its application revoked with retrospective effect from 1 March 2020.
With social distancing measures limiting the capacity in which a wide variety of industries are able to trade, suspension of this provision will likely provide a degree of confidence to corporations in their provision of ongoing goods and services.
However, it will be interesting to see how this change impacts post-insolvency enforcement measures in substance. IPs generally assess wrongful trading liability over far broader periods than a single month, and entities heading toward insolvency (whether due to Coronavirus uncertainty or not) prior to the 1st of March are unlikely to enjoy protection.
Moreover, the amendment as announced may do little to inhibit the enforcement of other measures that could punish a director’s breach of fiduciary duty in continued trading, particularly as the government has noted Companies Act duties will remain in place.
A moratorium on creditor administration appointments
Although some degree of pressure to enter insolvency has been lifted by government measures, Mr. Sharma also highlighted plans to implement a temporary moratorium for businesses undergoing a restructuring process. During this period, it would be impossible for creditors to appoint administrators over debtor companies.
The announcement of this amendment will likely establish far more questions than it answers, particularly while we are awaiting guidance on the precise characteristics of the moratorium. In the interim, creditors may be faced with the choice of seeking to appoint before these changes take effect, or waiting to enforce their security at some indeterminate point in time when these measures might be revoked.
Moreover, it is currently unclear if such a moratorium would apply exhaustively both to in and out of court charge-holder appointments, for how long it would last, or if any exceptions would apply to its application. In addition, it appears extremely likely that, as in Spain and Germany, a similar ban will be extended to winding-up petitions, particularly as the current court back-log would prevent their being heard for the considerable future regardless of any policy imperative. Mr. Sharma has also suggested implementation of a new restructuring plan and measures to maintain supply chains of entities subject to the new moratorium, but specific details are yet to be announced.
As the Coronavirus Act itself recently passed through parliament in only six days, more exact guidance on these changes will doubtless be made available soon.
If you require any further guidance on insolvency-related matters, please do get in touch.
This article represents our understanding of the law in England and Wales as at 1 April 2020. Its contents are not intended to serve as legal advice and should not be considered as a substitute for taking legal advice.