As COVID-19 continues to cause widespread economic disruption, the UK government has announced lending measures to support struggling businesses. This alert summarises:
- the measures available;
- key legal considerations for directors hoping to take advantage of new debt; and
- practical steps directors can take to protect themselves from personal liability.
This alert is relevant to directors of disrupted, stressed, and distressed companies who are considering additional borrowing.
What has the government announced?
The High Court recently ruled that the general directors’ duties prescribed by sections 171-177 of the Companies Act 2006 (“CA 2006”) (the “General Duties”) continue to apply to directors after their company has entered administration or creditors’ voluntary liquidation (“CVL”). This is notwithstanding that after the appointment of an administrator or liquidator, the ability and rights of directors to control the company are legally and practically curtailed.
Currently, when a UK airline enters insolvency, its operations cease, aeroplanes are grounded and passengers are stranded – in part due to the heavy industry regulation and, in part, because of complex aeroplane financing arrangements. Any operational continuity enabling the repatriation of passengers would be a loss-making activity likely to deplete the amount of money available to the company’s creditors; a result that would be contrary to the aim of UK insolvency processes in general. This starkly contrasts with insolvent U.S. airlines, all of which have been in U.S.
Summary
Case:Pantiles Investments Ltd & Anor v Winckler [2019] EWHC 1298 (Ch)(23 May 2019)
Summary
It is a defence to an unfair preference claim to show there were no reasonable grounds to suspect the insolvency of the debtor company.
Referred to as the ‘good faith defence’, the creditor has the onus of establishing the defence contained in section 588FG(2) of the Corporations Act 2001 (Cth).
Suspicion of insolvency
The courts have identified the following principles with respect to the good faith defence:
In the recent case of 1st Fleet Pty Ltd (in liquidation), the Court clarified the information disclosure obligations of external administrators in the Insolvency Practice Schedule (Corporations) (IPSC) and Insolvency Practice Rules (Corporations) 2016 (Rules).
There is only a short time period for compliance, and there can be cost consequences for non compliance.
SUMMARY
The Court of Appeal of England and Wales (“CA”) made a significant ruling on two matters affecting the powers and duties of directors of English companies.
In business it is not uncommon for a director of a company to be owed money by that company.
If the commercial relationship breaks down, the director may think it is an option to serve a creditor’s statutory demand on the debtor company.
However, recent court decisions demonstrate that issuing a creditor’s statutory demand is not a sure fire method of obtaining payment where the director is owed the debt personally or is a director of both the creditor and debtor companies.
Cases where statutory demands have been successfully challenged
English law restructuring and insolvency tools are used to implement financial restructurings and the external administration of foreign companies. The attractiveness of the English tools and legal system is highlighted by the prevalence of companies incorporated abroad, especially companies incorporated in the EU, which avail themselves of those tools. English law in this area is impacted by much European law.