COVID-19 and Government-imposed restrictions are placing an unprecedented strain on everyone and businesses and individuals may be facing extreme financial pressure. COVID-19 is impacting businesses throughout the supply chain in most, if not all, sectors. This may mean that clients and debtors are unable to meet their obligations and there may need to be changes as to how these are dealt with. This note aims to provide some guidance to help Insolvency Practitioners (“IPs”) deal with certain practical issues that may arise in active cases.

Over the weekend, the Business Secretary announced that UK Insolvency Laws will be changed.

The changes will give businesses “extra time to weather the storm” and give comfort to directors who, challenged with trading through a difficult cash flow period, will not face claims for wrongful trading.

Relaxation of wrongful trading provisions

The proposed measures alleviate concerns that borrowing additional funds offered by the Government could place a director at risk of personal liability.

Directors will soon be free to make decisions to trade on even insolvent entities, and incur debts in the ordinary course of business, with the passing of the Coronavirus Economic Response Package Omnibus Act 2020 last night and Royal Assent today. The Act is intended to encourage business to continue trading free of risk that insolvent trading laws – which prevent directors of insolvent companies incurring fresh debt – would impose a personal civil and criminal liability on them. There are also changes to statutory demands and debtor's petitions.

In this article, we focus on working capital and consider ways a business can seek to weather the storm and preserve all-important liquidity through this challenging period.

Practical Tips

Given the unprecedented challenges presented by COVID-19 globally, what can senior management do in order to manage and mitigate the risk to the company's financial health?

As we close the week which has seen the Government and the Bank of England publish details of their financial support package for business, the business community awaits the formal launch of both the Coronovirus Business Interruption Loan Scheme (CBILS) and the Covid Corporate Financing Facility (CCFF) next week.

CBIL scheme

The hair salon Regis announced recently that the company has entered administration. The news might not come as a surprise because the chain, prior to the company’s administration, was subject to a company voluntary arrangement (“CVA”) whose validity was challenged by landlords.

The joint administrator of Regis commented: “trading challenges, coupled with the uncertainty caused by the legal challenge, have necessitated the need for an administration appointment”.

Today the Government published draft provisions for inclusion in the Finance Bill which will amend the Insolvency Act 1986 and grant HMRC preferential status on insolvency. A status that was removed in 2003 but which will be re-instated (in part) from 6 April 2020.

Despite huge concern from the lending market, voiced in responses to the Government’s consultation on this measure, the only material change we can see is confirmation that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.

The proposal to reinstate Crown preference in insolvency has met resistance from all angles; the insolvency profession, turnaround experts, accountants, lawyers and funders. But despite HMRC’s bold statement in its consultation paper that the re-introduction of Crown preference will have little impact on funders, it is clear following a discussion with lenders that it may well have a far wider impact on existing and new business, business rescue and the economy in general than HMRC believes.

Last Thursday's decision in the WA Supreme Court to allow a sale to insiders of a company subject to a deed of company arrangement will make the restructuring process smoother for administrators, who can now negotiate with a wider pool of potential purchasers, as Chapter 2E of the Corporations Act 2001 (Cth), which deals with related party transactions, will not apply (Mighty River International v Bryan Hughes and Daniel Bredenkamp as Deed Administrators of Mesa Minerals Ltd (Subject to Deed of Company Arrangement) [No 2] [2018] WASC 368; Clayton Utz acted for the deed administrators of Mes

Some 25 years after Harmer promised a faster, more efficient and commercial approach for dealing with failed and failing companies, Australia's highest court has this morning confirmed that creditors can contractually bind a company and all stakeholders to a moratorium extension via a properly formed holding DOCA (Mighty River International Limited v Hughes [2018] HCA 38; Clayton Utz acted for the successful Deed Administrators of Mesa Minerals Limited).