The UK Government recently announced proposed reforms to insolvency law. Some of the changes announced are in direct response to concerns around the application of insolvency laws during the COVID-19 pandemic, whilst others have been in discussion for several years and are now seemingly being fast-tracked onto the statute books.

The clear intention of the Government is to inform business behaviours and to give businesses that have been adversely impacted by the current crisis some breathing space from creditor pressure and working capital challenges.

Wrongful trading

First, under the UK’s insolvency regime, a director may find themselves personally liable to contribute to the assets of the company if:

1. they continue to trade when they knew, or ought to have known, that the company could not reasonably avoid an insolvent liquidation or administration; and
2. they did not do everything a reasonably diligent director ought to have done to minimise the losses of the creditors of the company.

The Government proposes to suspend these rules temporarily, in line with action taken in other countries. The detail of the reforms are yet to be released, but it has been confirmed that the reforms will have retroactive effect to protect directors from 1 March 2020.

Whatever form the changes take, the proposals are likely to be of assistance to directors who are currently facing difficult decisions about continuing to trade or taking on extra support and credit at a time where their ability to generate income remains in doubt as a result of the COVID-19 outbreak.

However, directors will need to continue to be mindful of good business practices and be able to justify the actions they do take, as directors will continue to be subject to their statutory and common law duties (further information on these can be found here). Notably, there does not appear to be any proposed changes to legislation covering the offences of fraudulent trading or misfeasance so these offences will continue to regulate the activities of directors and help protect creditors of distressed and insolvent companies.

Restructuring plans

Secondly, the Government is pushing ahead with certain restructuring measures first proposed in 2016.

The main three proposals are as follows:

1. Moratorium period: businesses looking to agree a restructuring plan with its creditors will benefit from a moratorium. The moratorium would give the company ‘breathing space’ during which they are protected from their creditors taking steps to litigate or taking other enforcement actions.
2. Restructuring plan: a new type of formal restructuring plan will be introduced whereby a company can, with the consent of at least 75% of its creditors, effect a binding restructuring plan which binds all creditors of the company.
3. Protection for supplier contracts: suppliers of any company undertaking a restructuring plan will not be able to terminate their contracts as a result of that company’s insolvency in order to allow the company to continue to trade.

The proposals have generally been welcome to provide the UK more debtor friendly restructuring options.

The Government will provide further detail on all these reforms in due course, and we will update on their implementation as soon as possible.

This information is part of a series of Harbottle & Lewis Business Law Updates, focusing on legal and business operational issues arising in the current COVID-19 crisis. 

If you have any queries on their content, please contact businesslawupdate@harbottle.com.