COVID-19: Corporate Insolvency/Directors’ Duties – Update

Since publication of our previous Article on Covid-19: Corporate Insolvency and Directors’ Duties here, the UK Government have announced the measures they intend to enact to assist businesses that find themselves in an insolvency situation, due to the impact of the crisis.

To help assist businesses combat the impact of Covid-19, the Business Secretary announced new far reaching measures on 28 March 2020.

WRONGFUL TRADING

One of the main changes announced is a suspension of wrongful trading provisions under the English Insolvency Legislation, retrospectively, for a period of 3 months from 1 March 2020. The idea behind the measures is to give much needed “breathing space” for company directors to allow otherwise viable companies to avail of the Government’s support package and weather the storm.

The measures have been generally welcomed and will provide some comfort to directors as they navigate this difficult period. However, wrongful trading sanctions are in place in order to protect creditors, and a blanket suspension is open to abuse, and some concerns have been voiced by industry representatives. R3, the Association of Business Recovery Professionals have encouraged directors with concerns about their company to seek professional advice at the earliest opportunity.

The legislation behind these new measures is awaited when the finer details will be confirmed. It is important for company directors to remember that the existing law on directors’ duties remains in place, and any decisions taken during the current crisis should be carefully documented and appropriate advice sought.

OTHER CHANGES TO INSOLVENCY RULES

The government has also said that the following new measures will be introduced:

• A short moratorium for distressed but otherwise viable companies whilst rescue options are considered. The moratorium will initially last for 28 days but could be extended for up to 56 days in certain circumstances;
• A prohibition on enforcement by suppliers of termination clauses in contracts with businesses in an insolvency procedure. This is designed to protect payment of staff and provision of raw materials. Termination may however still be available where other grounds are triggered such as non-payment and may have little practical impact; and
• A new restructuring plan similar to the scheme or arrangement with the distinction that it allows for a “cross cram down” of dissenting creditors that are no worse off than a liquidation scenario.

POSITION FOR NORTHERN IRELAND

It remains to be seen whether the Government in Northern Ireland will enact similar legislation to apply to the province. The Insolvency Service in Northern Ireland have stated that their policy is to keep NI insolvency legislation in parity with that which is enacted at Westminster and they are waiting to hear formally from The Department for Business, Energy and Industrial Strategy on these measures, and it is likely that the NI Minister will consider enacting or extending similar legislation in Northern Ireland.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency & Business Restructuring team at Cleaver Fulton Rankin for further advice or information.