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Changes in the UK’s insolvency laws

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus|UK Insights on Brexit

By Catherine Lewis , Elizabeth Mason and Mark Pring | December 14, 2020

This article discusses the UK’s new insolvency laws and their impact on economic disruption in a COVID-19 environment.

Now that a second lockdown has passed in England, we reflect on the impact of COVID-19 and the consequential economic disruption in the context of changes to UK insolvency laws. The temporary measures introduced by the UK government in March 2020 have since been extended to assist the many companies that may otherwise face insolvency.

Equally, the period prior to insolvency brings with it risks for directors and officers and such individuals should be mindful of steps they are taking in times of economic crisis.

On 20 March 2020, the Department for Business, Energy and Industrial Strategy published the Corporate Insolvency and Governance Bill. Following significant debate in the House of Commons and the House of Lords, the Corporate Insolvency and Governance Act 20201 (the “Act”) received royal assent and came into force on 26 June 2020. The legislation represents the most significant amendment to the UK’s insolvency laws since the Enterprise Act 2002 introduced the administration regime.

The government first launched a review of the UK’s corporate insolvency framework in 2016 and concluded its consultation in 2018. Implementation of the reforms was delayed, however, due to the Brexit process. The reforms then gained new impetus as a result of the unprecedented circumstances faced by businesses as a consequence of the COVID-19 pandemic and the Act is the outcome of an extremely accelerated drafting process. It incorporates the COVID-19 emergency measures outlined by the UK government in general terms in the last few months, as well as the broader insolvency reforms contemplated over the last few years.1

There are both permanent and temporary reforms, briefly as follows:

  1. 01

    Moratorium

    The introduction of a company moratorium, which is aimed at giving struggling businesses a formal breathing space to pursue a rescue plan. It creates a moratorium of, initially, 20 business days (subject to extension), which provides a payment holiday in respect of most pre-moratorium debts and restrictions against enforcement action (except with the consent of the Court).

  2. 02

    Restructuring plan

    A new restructuring plan modelled on the scheme of arrangement. It will enable companies in distress to propose a compromise with creditors and/or members, or any class of them. Crucially, the plan will enable cross-class “cram downs” – i.e. the proposals may be sanctioned by the Court notwithstanding that certain classes may have voted against it, subject to certain safeguards for minority interests. The restructuring plan, in conjunction with the availability of the moratorium, will offer a further degree of flexibility to the UK restructuring regime and may be regarded as closing a perceived gap with its global competitors, particularly across the Atlantic.

  3. 03

    Ipso facto clause restriction

    The introduction of a prohibition on suppliers terminating the supply of goods and services on a counterparty’s insolvency. The prohibition will essentially render invalid any term of a contract for the supply of goods or services, which will allow the supplier to terminate or vary the contract upon a company becoming subject to insolvency proceedings (including the new restructuring plan and moratorium). This reform is similar to reforms already made to the insolvency laws in Australia and Singapore.

Temporary measures

In addition, the Act includes the following key temporary measures:

  1. 04

    Temporary suspension of liability for wrongful trading

    In order to reduce the pressure on directors during the COVID-19 emergency, the UK government temporarily suspended the wrongful trading regime during the ‘relevant period’. The period ran from 1 March 2020 to 30 September 2020. On 26 November 2020, the government reinstated the temporary suspension during the ‘relevant period’, defined in the new regulations as beginning on 26 November 2020 and ending on 30 April 20202. Despite the reinstatement of the temporary suspension, directors need to ensure they continue to monitor the company’s financial position, and comply with all their statutory duties.

    In order to reduce the pressure on directors during the COVID-19 emergency, the UK government temporarily suspended the wrongful trading regime

  2. 05

    Temporary restrictions on presentation of winding-up petitions and statutory demands

    The UK government has legislated to temporarily prevent winding-up proceedings being commenced on the basis of statutory demands and to temporarily stop winding-up proceedings where COVID-19 has had a financial effect on the company, which effect has provided the grounds for the proceedings.

    The measures will prevent any statutory demands made against companies in the period from 1 March 2020 to 31 December 2020 from being used as the basis of a winding-up petition from 27 April 2020. On 9 December 2020, the government announced it intends to reinstate the temporary suspension, and extend the period to 31 March 20213.

    The temporary measures also apply to any winding-up petitions presented between 27 April 2020 and 31 December 2020 in respect of the general ground of insolvency that a company is unable to pay its debts as they fall due unless the creditor has reasonable grounds for believing that:

    • the coronavirus has not had a financial effect on the company (notably, a low threshold); or
    • the relevant ground would apply even if the coronavirus had not had a financial effect on the company.

    Similarly, the temporary measures prevent a winding-up petition being presented between 27 April 2020 and 31 December 2020 on the ground that it can be proved to the satisfaction of the Court that the value of the company’s assets is less than the amount of its liabilities (taking into account its contingent and prospective liabilities) unless the creditor has reasonable grounds for believing (a) and (b) above.

    the temporary measures prevent a winding-up petition being presented between 27 April 2020 and 31 December 2020

    On 9 December 2020, and as noted above, the government announced it intends to reinstate the temporary measures, and extend the period concerning winding-up petitions to 31 March 20214.

    The Act also provides that any winding-up order made in the interim period (between the government’s guidance on the temporary measures, which took effect on 27 April 2020 and the Act coming into force) is void if it does not meet the above requirements. Any action taken by the Official Receiver, liquidator or provisional liquidator in respect of the winding-up order will not make them liable to any civil or criminal proceedings. The Court may give such directions to the Official Receiver, liquidator or provisional liquidator as it thinks fit for the purpose of restoring the company (to which the winding-up order relates) to the position it was in immediately before the petition was presented.

  3. 06

    Temporary measures concerning meetings and filing of accounts

    The UK government has also introduced temporary provisions to ensure that qualifying bodies are able to hold AGMs and other meetings during the relevant period (i.e. 26 March 2020 to 31 March 20215) in a manner consistent with the need to prevent the spread of COVID-19. These measures include enabling meetings to be held and votes cast by electronic and other means.

The Act is a result of some very swift drafting (in excess of 250 pages), and significant consultation by the Insolvency Service (in a short timeframe) with the Parliamentary Liaison Committee, the Official Opposition, business and retail groups, private companies, trade unions and the insolvency profession. The government is of the view that this legislation will offer vital support to businesses, helping them address challenges resulting from COVID-19.

Key points and tips for directors/officers

The following tips are general good practice, but particularly so in times of economic uncertainty:

Document your decision-making

It is vital that decisions on the management and operation of the company are properly made, and documented accordingly

Obtain appropriate external advice where necessary

Obtaining independent advice (whether legal and/or financial) before making significant decisions, particularly when entering into significant transactions or changing payment terms of major contracts, should demonstrate that decisions are properly and impartially made.

Understand your D&O cover

It is not uncommon for Directors’ & Officers’ liability insurance cover to exclude liability for loss connected with insolvency or bankruptcy. The D&O insurance market is under extraordinary pressure at present and insurers have actively been seeking to limit the scope of cover. Speak to your broker if anything is unclear, or you want to discuss renewal terms.

It is not uncommon for Directors’ & Officers’ liability insurance cover to exclude liability for loss connected with insolvency or bankruptcy

Engage with any liquidator or administrator

Ultimately, it is not in a liquidator’s or an administrator’s interest to pursue individuals when there is no evidence of wrongdoing. A liquidator or administrator will also understand and appreciate the benefit of having D&O insurance in place to cover third party claims (and, particularly, defence costs) and may therefore seek to ensure that adequate “run-off” cover (if available in the market) is in place when the business is winding down.

Footnotes

1 https://www.gov.uk/government/news/new-measures-to-protect-uk-high-street-from-aggressive-rent-collection-and-closure

2 https://www.legislation.gov.uk/uksi/2020/1349/regulation/2/made

3 https://www.gov.uk/government/news/government-gives-businesses-much-needed-breathing-space-with-extension-of-insolvency-measures#update-december-2020

4 https://www.gov.uk/government/news/government-gives-businesses-much-needed-breathing-space-with-extension-of-insolvency-measures#update-december-2020

5 https://www.legislation.gov.uk/uksi/2020/1349/regulation/3/made

Disclaimer

This document includes views provided by third parties. The statements and opinions made by those third parties are those of the relevant individuals and do not necessarily represent the views of Willis Limited, its parent or sister companies, subsidiaries, affiliates, or its management. The inclusion of those third party views in this document does not, and is in no way intended to, represent the views of Willis Limited on market practice, or any agreement by Willis regarding the same. Willis Limited is not responsible for the accuracy or completeness of the third party views contained herein, and disclaims any responsibility or liability for the reader’s application of them to any analysis or other matter, or for any results or conclusions based upon, arising from or in connection with them, nor do these third party views guarantee, and should not be construed to guarantee, any particular result or outcome. Willis Limited accepts no responsibility for the content or quality of the third-party views included in this document.

Authors

Associate, Reed Smith

Associate, Reed Smith

Partner, Reed Smith

Contacts

Executive Director
Coverage Specialist, FINEX


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