Emergency Changes to Insolvency Law
On 28 March 2020, the Business Secretary announced changes to the current insolvency legislation to help businesses affected by the current economic climate resulting from the COVID 19 crisis.
We are now expecting a new legislation implementing reforms in the corporate insolvency, some of which will be albeit temporary. The subsequent press release indicated that the new legislation will essentially be dealing with the following:
Wrongful trading suspension
Under the existing wrongful trading rules, the directors may become personally liable for wrongful trading if company continued trading at a time when they knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration. On 28 March 2020, the suspension of these wrongful trading provisions was announced for a period of three months with effect from 1 March 2020 which may be extended if necessary. We do not know how this suspension will be implemented and whether there will be any caveats to this suspension.
Fast tracking of the restructuring tools announced in August 2018
In August 2018, Department for Business, Energy and Industrial Strategy published a report on reforms to insolvency laws and the Government indicated that they will accept certain new restructuring tools to assist businesses in difficulties to explore rescue options available, which would include:
- a period of moratorium for companies so creditors cannot take any action against companies while the directors and management explore various options available to rescue or restructure the business.
- during this moratorium period such companies will be allowed access to essential supplies to enable them to continue their business. We do not know how this will be secured but assume it will cover access to raw material etc.
- a new restructuring plan that would bind all creditors. It is difficult to comment on this process and how cost effective this will be for SMEs who would be already struggling at this stage.
It appears that these reforms will be fast tracked in the light of COVID19 to provide a further respite to the businesses that are facing financially challenging times.
Temporary practice direction
A new temporary practice directive came into effect on 6 April 2020, expiring on 1 October 2020, essentially dealing with procedural changes in the light of coronavirus crisis and lockdown. This direction deals with electronic filing, remote hearing, listing of urgent hearings and making statutory declarations before an authorised person but not in physical presence. It also addresses ongoing issues relating to e-filing process for the appointment of administration.
This area of law will see considerable changes in coming weeks and very little detail is available at the moment in the absence of a draft legislation. Therefore, should your business face financial difficulties, it is important that you check the latest legal position and obtain professional advice to understand the available options.
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