A guide to the impact of the insolvency law reforms

Posted: 15/04/2020

On 28 March 2020, business secretary Alok Sharma announced plans to reform insolvency law to add new restructuring tools, including:

• a moratorium for companies in order to give them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
• protection of companies’ supplies to enable them to continue trading during the moratorium; and
• a new restructuring plan, binding creditors to that plan.

In addition, the proposals will include key safeguards for creditors and suppliers to ensure they are paid while a solution is sought.

The most heralded change was a temporary suspension of wrongful trading provisions to give company directors greater confidence to trade during this pandemic emergency, without the threat of personal liability should the company ultimately fall into insolvency. However, it was also explicitly stated that the existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.

While broadly welcomed at the time of the announcement, we take a look at the practical impact of these proposed reforms.

The devil is in the detail

The government has said that it would be introducing new legislation to bring these measures into effect at the earliest opportunity. However, as Parliament is in recess until 21 April 2020, it is not clear when the legislation will be introduced. It may be that the reforms will correspond with the government’s response to the 2018 Insolvency and Corporate Governance consultation. The bottom line is that until the legislation has been carefully scrutinised, companies and directors are not going to be able to rely on it and so have to make decisions about continuing to trade based on the current law and these policy announcements. The restructuring and insolvency team at Penningtons Manches Cooper are on hand to guide you through the necessary tests and considerations.

Wrongful trading reform – an answer to your prayers?

Our guide for company directors sets out the wrongful trading law and proposed changes in more detail. Before directors assume that the suspension of wrongful trading will come into effect from 1 March 2020 and enable them to relax in terms of personal liability, the reality is that the circumstances that would have given rise to an accusation of wrongful trading may still give rise to other liabilities, such as for misfeasance for breach of duties. Therefore, it remains to be seen what practical benefit these reforms entail for embattled company directors.

Cash is king

It is hoped that the proposed reforms will become law as soon as possible, thereby helping businesses and providing more tools for insolvency practitioners to save troubled companies. Ultimately, however, cash flow will still be critical. Our corporate law specialists have produced guides to the Coronavirus Business Interruption Loan Scheme to assist companies, but it is clear from the headlines and reports from clients that only a small number of loans have been granted in comparison to the hundreds of thousands of loan enquiries. The banking and finance specialists at Penningtons Manches Cooper are available to help businesses navigate this measure and advise on the preparation of the critical loan agreements.

Courts lead the way

While we await further policy announcements and the legislation to enact the proposed reforms, the courts have quietly and effectively been making practical changes. The Insolvency and Companies Court has determined that winding-up petition hearings cannot be heard remotely. This means that all outstanding winding-up petition hearings have been adjourned for three months. In addition, HMRC has confirmed that it has paused the majority of all insolvency activity for now and will not petition for bankruptcy or winding-up order unless it is deemed essential (ie fraud or criminal activity).

These practical changes may have the largest effect on embattled companies. However, as winding-up petitions can still be issued, companies are still at risk of critical banking facilities being withdrawn, the termination of contracts by suppliers and any disposition of the company’s property or any transfer of shares being held void.

In summary, the proposed reforms are welcome but at the moment they in part represent policy statements which should not lull companies and their directors into a false sense of security. Our restructuring and insolvency specialists are on hand to guide you through these turbulent times.

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