COVID-19/Coronavirus: The Government’s corporate insolvency framework reforms

02 April 2020

On Saturday 28 March, the Business, Energy and Industrial Strategy (BEIS) Secretary, Rt Hon Alok Sharma MP, announced that, in order to help support businesses through the economic impact of COVID-19, the Government "will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue." (Read our statement in response here, and the House of Commons Library research briefing here.)

Under the plans, the Government will fast-track a package of reforms first published in 2016 (and updated in 2018), which will see a number of additions to the UK's corporate insolvency framework:

• A short business rescue moratorium to protect companies from creditor action while they consider their options;

• A new court-based restructuring tool modelled on an existing measure (the English Scheme of Arrangement); and

• New rules to prevent suppliers from cancelling contracts with businesses in an insolvency procedure.

The Government will also temporarily suspend the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency, without the threat of personal liability should the company ultimately fall into insolvency. However, existing laws for fraudulent trading and the threat of director disqualification will remain unaffected in order to act as a deterrent against director misconduct.

It is not yet clear when these changes will be introduced, and how much formal consultation will be possible before they become law, given that Parliament is currently in recess and is due to return in late April. The full details of these proposals are also still to be announced.

The reforms: what will they entail?

The proposals for the moratorium, rescue tool, and supplier reforms were first announced by the Government in 2016, but due to the Brexit-related strain on the parliamentary timetable, progress on introducing these reforms has been slow. In a further consultation in 2018, the Government made a number of changes to these proposals, as well as announcing wider corporate governance reform measures. These latter measures were not included in the March 2020 announcement.

R3 expects that there will be some differences between the 'new' versions of the reforms and what was announced in 2016 and 2018. Feedback from R3's members has been that some of the tools - particularly the moratorium - will need to be more practical and flexible than previously proposed if they are to make a difference.

Below is a short summary of what these reforms are intended to do as per the 2018 consultation:

• Business rescue moratorium: The new business rescue moratorium aims to give a company 'facing prospective insolvency' the opportunity to establish a rescue plan free from the threat of creditor enforcement. Directors will remain in control of the company, which will be able to continue trading (as long as it can afford to do so) as a plan to deal with its debts is put in place. An insolvency practitioner will be appointed as a 'monitor' to oversee the process.

The moratorium will last for 28 days initially, but can be extended by a further 28 days upon approval from the monitor; any further extension must be supported by more than 50% of secured and unsecured creditors.

• Restructuring tool: The new restructuring tool adopts some of the principles of the American 'Chapter 11' procedure but actually most closely mirrors the current English 'Scheme of Arrangement'. The new tool will allow a company to bind all its creditors to a restructuring plan, including groups of dissenting creditors.

Restructuring proposals will be subject to the scrutiny of the courts, which will ensure the proposals are fair, and to a creditor vote. Creditors will be allowed to put forward alternative proposals. The final agreement will be signed off by the court.

• Prohibition of 'termination clauses' in insolvency ('essential supplies'): One challenge encountered by the insolvency and restructuring profession when rescuing businesses is that suppliers use clauses in contracts which allow them to stop supplying a company in an insolvency procedure. As part of the Government's reforms, legislation will be introduced to prevent the enforcement of 'termination clauses' by a supplier of goods or services, where the clause allows a contract to be terminated on the grounds that one of the parties to the contract has entered a formal insolvency procedure.

However, suppliers will retain the ability to terminate contracts on any other grounds covered by the contract and they will not be compelled to renew or extend contracts upon their expiry. Certain types of financial products and services will also be exempt, as well as licences issued by public authorities.

First impressions

The UK has a world-leading insolvency and restructuring framework, and the new restructuring tools in this package give our profession more options to help businesses navigate COVID-19 disruption. We're pleased Government has listened to the profession's feedback and is focused on making these tools accessible for the businesses that need them.

The details of how exactly these tools will work are still to be fleshed out, but we are hopeful that the Government will address many of the concerns the profession has expressed about the reforms since they were first announced in 2016. The moratorium, for example, will not be useful if it cannot be accessed by insolvent companies. It's important that, as the Government works on the details, it listens to creditors - including lenders, the wider business community, and landlords - on how they will be affected by the moratorium.

Until the tools are introduced, the profession will continue to use the wide range of tools it has at its disposal to help restructure businesses and rescue jobs.

Many within the profession, however, have some serious concerns about the Government's plans to suspend wrongful trading. A blanket suspension could risk abuse. The provisions are there for a reason and protect creditors. We do understand that directors may be worried about the consequences of continuing to trade amid the COVID-19 disruption if they are missing debt payments, but good advice from an insolvency practitioner or insolvency lawyer will remove their risk of facing a wrongful trading action. This issue will be tackled in depth in a forthcoming post.

Overall, there is much to celebrate in the Government's announcements from a business rescue standpoint, and R3 looks forward to engaging with civil servants on the profession's behalf as the laws make their way onto the statute books.