Helping companies in trouble
The Corporate Insolvency and Governance Bill was read in the UK Parliament last month and is likely to be welcomed by many firms facing potential insolvency due to coronavirus. It aims to stop the expected tidal wave of insolvencies and provides reassurances and protections but businesses facing potential insolvency will still need to tread carefully.
The Bill suspends provisions around wrongful trading from at least 1 March to 30 June. Under the old wrongful trading provisions, directors faced personal liability on debts incurred by their company when they continued to trade knowing that the firm was unlikely to avoid going into insolvent liquidation. For directors who may have previously rushed to liquidate businesses with these provisions in mind, this suspension should help delay that process.
However, this Bill does not take away other obligations on directors. They still need to act in the best interests of creditors if they think their firm is in an insolvent position. Directors will need to think carefully about whether to continue to trade their firm if there is not a reasonable prospect of avoiding liquidation.
Winding up petitions have been temporarily restricted by the Bill, probably in response to some landlords who have tried to circumvent restrictions on normal lease termination due to coronavirus by using insolvency processes. The Bill will stop the ability to use some of these tactics and creditors will need to have a reasonable argument that shows the firm’s inability to pay is not due to coronavirus.
For firms that have become unable to pay their debts during this time, the Bill offers protection that is probably a welcome development for hospitality and retail sectors in particular.
Another major but permanent change is a standalone moratorium to give struggling firms breathing space to try to recover. Unless the court expressly allows otherwise, the moratorium will essentially suspend a variety of creditors’ abilities such as chasing debts through the courts or enforcing securities for as long as it is in force. To qualify for the moratorium, firms will need a qualified insolvency practitioner (IP) to act as “monitor” who must think that the moratorium will help rescue the company. Creditors may worry that such a moratorium will be subject to abuse but there are safeguards. As monitor, the IP is required to assess, throughout the moratorium, whether rescue of the company is likely. The monitor also has a lot of control over which debts can be paid and which property can be sold. If creditors aren’t happy with the decisions the monitor has taken – including allowing the moratorium to continue – they can apply to court. If the firm can be turned around, creditors will still have a company to trade with on the other side.
•Nicola Ross is a partner on the litigation team at law firm Morton Fraser