Proposed reforms to UK insolvency law

The UK government has introduced the new Corporate Insolvency and Governance Bill, designed to help businesses weather the impacts of the current COVID-19 pandemic. This article looks at some of the measures including: changes to the corporate insolvency regime in the UK, and new protections for companies and their directors during the current climate.

Corporate insolvency reform

The Bill sets out new measures to assist in rescuing companies in financial distress. The provisions are more friendly to debtors than those familiar with UK insolvency rules will be used to. The main insolvency provisions are:

  • A new statutory moratorium regime for debtor companies
  • A new restructuring plan procedure
  • Provisions invalidating contractual provisions in contracts for the supply of goods and services, triggered by insolvency proceedings
  • COVID-19 provisions comprising:
  • Mitigation of director liability for wrongful trading
  • Restrictions on the presentation of winding-up petitions for a four-month period to recover debt.

New statutory moratorium regime for debtor companies

The moratorium must be proposed by the company’s directors and it is generally commenced by simply filing papers with the court (although in some cases a court order is required).

To take advantage of the moratorium, a company must not already be in any type of insolvency process or have been subject to a moratorium, company voluntary arrangement or administration in the previous 12 months (although this rule is relaxed for the first month after the Bill becomes law). 

The directors must state that in their view the company is, or is likely to become, unable to pay its debts. This must be supported by a certificate by an insolvency practitioner stating that it is likely that a moratorium would result in the company being rescued as a going concern.

The moratorium will come into effect at the time the relevant documents are filed with the court (or at the time of a court order, if required). It will initially last for 20 business days, but it can be extended with creditor consent for up to one year or for longer periods by court order, subject to certain conditions.

What happens during a moratorium?

The moratorium will be policed by an insolvency practitioner (the “monitor”). The monitor will continuously consider whether it remains likely that company is likely to be rescued as a going concern and can terminate the moratorium early.

The directors will be able to keep control of the company, and it cannot be placed into insolvency proceedings except by the directors.

In addition:

  • landlords cannot forfeit without court permission;
  • most security cannot be enforced without court permission;
  • most legal processes against the company cannot start or continue without court permission;
  • floating charge holders cannot give notice to crystallise their charge;
  • no new security for debts can be granted during the moratorium without the monitor’s consent.

There are various restrictions on the activities of the company during the moratorium, particularly in relation to the incurring of new debts and liabilities.

New restructuring plan

A new type of restructuring plan will be available where a compromise or arrangement is proposed between a company and its creditors, but only if the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. The purpose of the plan must be to eliminate, reduce, prevent or mitigate the effect of any of these financial difficulties.

Provisions invalidating contractual clauses that terminate for insolvency proceedings

The new provisions mean that, when a company goes into a formal insolvency process, any termination provision in a contract between a supplier and the company will become automatically invalid if it entitles the supplier to cease supplying goods or services as a result of the insolvency process (subject to some exceptions).

A supplier will not be allowed to demand payment of outstanding pre-insolvency charges as a condition of continuing supply.

Mitigating wrongful trading liability

For the period between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is later – and subject to the possibility of extension by regulation), the possibility for directors of most companies to incur liability for wrongful trading will be suspended. There is no requirement to show that the deterioration of the company’s financial position was due to the COVID-19 pandemic.

Restrictions on presenting winding-up petitions

The Bill provides for substantial restrictions on the presentation of debt-related winding-up during the same period as the suspension of wrongful trading liabilities. These include:

  • an outright restriction on petitions based on statutory demands
  • restrictions on petitions based on a company’s inability to pay its debts, unless there are reasonable grounds to believe that coronavirus has not been a contributory factor

As the Bill is retrospective, an existing winding-up order made during the relevant period but before the Bill comes into force and based on the company’s inability to pay its debts will be void if the court would not have made the order under the new restrictions.

When will the Bill come into force?

There is currently no fixed date for when the Bill will complete the Parliamentary procedure and become law. The Bill assumes that it will come into effect on the day after it is passed; however, it should be noted that much of the content of the Bill is retrospective.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.