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.
The government has introduced a number of measures in order to assist businesses during the current Covid-19 pandemic. Unfortunately, for some businesses, this may not be enough to prevent their business entering some form of insolvency. Businesses and directors need to beware of the pitfalls that they could fall into, as they continue to trade. Two of the most common are Preference Payments and Transfers at Undervalue, both of which are discussed below.
Preference Payments
The Carluccio’s judgment provides some much-needed clarity on the interrelation of the Furlough Scheme and the requirements of insolvency legislation. It is to be commended for its clarity and for the fact that it had to construe the workings of the Furlough Scheme in the absence of any statutory guidance as to its implementation. It is to be hoped that, when the Government comes to enact the necessary legislative measures (including perhaps amendments to Schedule B1 and IR 2016), that it does so with this judgment very firmly in mind.
New insolvency measures to support businesses under pressure as a result of the coronavirus outbreak have been announced.
These new measures will include a moratorium for companies against creditor action while they seek a rescue or restructure, protection of a business’ right to purchase supplies (including electricity and broadband) to allow companies to continue trading during a moratorium, a new restructuring plan which would bind all creditors, and a suspension of wrongful trading provisions for three months from 1 March 2020.
Introduction
The COVID-19 pandemic presents directors of all business entities1 with a profound and unprecedented set of challenges. Now more than ever, key decision-takers in businesses appreciate that their actions will be carefully judged following the crisis. Scrutiny of their actions will come from a range of interested and affected parties including creditors, employees, trades unions, landlords, customers, regulators, insolvency practitioners and possibly even law enforcement.
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: