In what is good news for many organisations struggling with the economic challenges posed by Covid-19, the UK's Business Secretary announced over the weekend that the government will push forward with various reforms to the English insolvency laws; in effect fast tracking reforms that were under discussion back in 2018.
During the Global Financial Crisis, borrowers who needed to refinance their maturing debts faced difficulty. Lenders had neither the appetite nor the ability to lend, save in limited circumstances. The income generated by commercial real estate assets often did not change, however.
It’s becoming apparent that despite the government’s intervention with business rate holidays, relief against forfeiture and furloughing of staff during the coronavirus pandemic, many licensed, leisure and retail businesses are in dire straits as a result of closure. Whilst emergency insolvency legislation is in place to provide a breathing space for companies, this will only help financially distressed but viable businesses. As a result, it is unfortunate that insolvencies already reported in the press will just be the tip of the iceberg.
Whilst no further action has, as yet, been taken to implement the foreshadowed changes to insolvency law in England and Wales (see our comments on the same), the Business and Property Courts of England and Wales ("BPC") have moved quickly to release a temporary Practice Direction on insolvency proceedings ("TIPD").
In light of the financially fragile state some businesses are finding themselves in as result of COVID-19, we discuss in this briefing note when – if ever – payments or other benefits can be given to some creditors but not others, and when such a transaction might fall foul of the unlawful preference provisions of UK insolvency legislation.
Wrongful trading laws have been suspended. But other relevant laws remain unchanged. Critically directors remain subject to the creditors’ interest duty. Read our article which examines the current position and highlights other key issues to be kept firmly in mind by directors and those advising them in these challenging times.
The Business Secretary Alok Sharma has proposed a relaxation to the current insolvency rules, in the hope that the measures will give companies some breathing space in the face of COVID-19.
Suspension of wrongful trading rules
The proposed changes include a temporary suspension of wrongful trading rules, which Alok Sharma suggested would apply retrospectively from 1 March 2020 for an initial period of three months.
COVID-19 is placing unprecedented strain on all businesses, and insolvency practitioner (“IP”) practices are no exception. Government-imposed restrictions on activities and movement will have a direct impact on the ability to carry on business as usual. There may be fewer employees available (through illness, self-isolation and furloughing), strain placed on remote working capabilities and a limited ability to carry out site visits to deal with cases as usual. Closure of schools and caring responsibilities may also lead to reduced personnel capacity.
The purpose of this note
The profound business and market interruption already caused by the COVID-19 outbreak has introduced insolvency risks for many otherwise healthy businesses.
This note summarises proposed insolvency law reforms announced on 28 March 2020 with some commentary on other recent COVID-19 developments in this area, including: