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: 

UK creditor schemes of arrangement under the UK Companies Act 2006 have recently gained popularity as a tool to “amend and extend” or comprehensively restructure debt obligations. In previous client alerts related to the restructuring of bonds issued by DTEK (May 2015) and the standstill scheme of arrangement for Metinvest (February 2016), we outlined some of the common reasons issuers find schemes of arrangement attractive and the types of schemes used to date.

The Government recently announced that it plans to introduce emergency changes to current UK insolvency law to ease the pressure on businesses (and their directors) struggling as a result of the coronavirus pandemic.

The Business Secretary said that the measures will be implemented ‘at the earliest opportunity’, although with Parliament not scheduled to return from recess until 21 April 2020 we may see some delay before the measures become law.

The Insolvency Service describes itself as the government agency that provides public services to those affected by financial distress or failure. It's core purpose is to deliver economic confidence by supporting those in financial distress, tackling financial wrongdoing and maximising returns to creditors. In order to achieve that purpose, the Insolvency Service utilises its investigation and enforcement powers to tackle financial or other misconduct.

On 6 April 2020, the Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020 came into force. This order amends the Insolvency Act 1986 (Prescribed Part) Order 2003, and increases the maximum amount of the prescribed part from £600,000 to £800,000.

Prescribed Part

The “prescribed part” is the term given to a portion of funds realised from assets charged by way of floating, but not fixed, charge, where:

1 the floating charge was created on or after 15 September 2003; and

As the prevalence of COVID-19 continues to grow worldwide, together with the resulting social and business restrictions, the inevitable fallout will be a failure to achieve business plans and an increase in business insolvencies.

The UK Chancellor, Rishi Sunak, stated whilst unveiling recent plans for a £330bn economic boost in light of the pandemic, “this is an economic emergency. Never in peacetime have we faced an economic fight like this one".

On 28 March 2020 the UK government announced that emergency measures will be implemented to provide protection to directors of companies which continue to trade notwithstanding the threat of insolvency, and to prevent, where possible, companies entering into insolvency due to COVID-19.

The proposed measures are as follows: