31.03.2020

BLOG: Simon Chapman on changes to UK insolvency laws

Simon Chapman, Partner, Corporate Finance

Business Secretary Alok Sharma has announced that there will be temporary changes introduced into the UK’s insolvency laws – another measure introduced to support companies hit by the COVID-19 pandemic.

 

We are still waiting for further detailed guidance to be issued so we can understand the specific measures being put forward, but on first look there are three key changes that the Government is looking to introduce.

 

  • The first announcement saw that changes will be made to enable UK companies undergoing a rescue or restructure process to continue trading – which would in turn give them the necessary breathing space from creditors.

 

This suggests that the Government will be looking to introduce a process similar to the Chapter 11 process in the USA.

 

Chapter 11 is a form of bankruptcy protection that involves the reorganisation of debts and assets, and proposals to introduce this in the UK have been in the pipeline for several years.

 

These plans will be brought forward to support companies in financial distress, by granting these businesses a moratorium period to re-structure. During this period creditors wouldn’t be able to seek enforcement action to recover debts, enforce security or issue winding up petitions.

 

  • Sharma indicated this will also include enabling companies to continue buying much-needed supplies, such as energy, raw materials and broadband while trying to rescue the business.

 

We will need further clarity on what this means, but it may refer to specific changes in policy – specifically an expansion of sections 233 and 233A of the Insolvency Act 1986.

 

An expansion of these sections of the act could see certain suppliers to continue to provide goods and services during a rescue process – and it may also mean preventing a restructuring process being used by a supplier as grounds to terminate or change terms of a contract.

 

We may also see a suspension of some creditor preference rules, under which companies that face the threat of insolvency must treat all creditors equally. If these rules were suspended it would enable companies to pay select ‘critical’ suppliers.

 

  • The statement also highlighted plans to suspend wrongful trading provisions retrospectively from March 1, 2020 for three months.

 

Without this proposed suspension, directors who take on additional trade and other debts (including Government backed loans under the Coronavirus Business Loan Interruption Scheme) in the current uncertain environment may have been concerned that they could become personally liable for these debts if their business subsequently failed and creditors lost out.

 

Removing the risk of claims for wrongful trading should alleviate directors seeking to save their businesses from some of these anxieties.

 

But, directors’ existing duties of care and the law on fraudulent trading will remain in place to protect creditors.

 

While the above changes are clearly welcome in removing director concerns about personal liabilities and helping to protect businesses, they do not alone deal with the crisis facing many companies in these difficult times.

 

With many suppliers requiring advance payments, the ability to continue buying much needed supplies or organise a restructuring isn’t much use if the business does not have sufficient cash to keep trading.

 

The team at Burgis & Bullock is here to support and advise you with any queries regarding your business during the COVID-19 outbreak.

 

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