6 Changes to Insolvency Law that May Affect Your Business

On 25th June 2020 the Corporate Insolvency and Governance Bill 2020 received royal assent and the Act came into force on 26th June 2020. The Act introduced three temporary amendments and three permanent changes to insolvency legislation with the aim of supporting and saving businesses during the coronavirus pandemic.

  1. The Restriction of Winding Up Petitions

The first temporary change is the prohibition of any winding up petitions being filed in relation to statutory demand served between 1st March 2020 and 30th September 2020. The exception being if the creditor has reasonable grounds to believe that coronavirus did not have a financial effect on the debtor or that without coronavirus the debtor would still not have been able to meet its debts. If a business was in financial difficulty prior to the pandemic, then a winding up petition can be pursued but the process may be more lengthy and costly than before the pandemic. This temporary measure has been extended to 31st March 2021.

2. Suspension of Wrongful Trading Provisions

The Insolvency Act 1986 contained wrongful trading provisions which make a Director personally liable if they continue to trade in the knowledge that the company cannot reasonably survive financially. This provision has been suspended temporarily meaning they are not responsible for financial deterioration of a company or its creditors between 1st March 2020 and 30th September 2020. Therefore, a Director cannot face wrongful trading claims during this period. Other breaches to directors’ duties remain in place. Unlike the Winding Up Petition, this provision has not been extended.

Hans Meijer, EICC Director at Coface UK & Ireland comments “This has now been extended to the 31st March 2021* – but in reality has never been successfully pursued by creditors or the courts due to cost restrictions and the strict requirement for the burden of proof.”

*now extended to 30th April 2020.

3. Deadline Extended for Filing Statutory Accounts

From 25th March 2020, businesses have been able to apply for a 3-month extension for filing their accounts as a temporary measure to help companies avoid penalties as they deal with the impact of COVID-19. The aim is to allow businesses to prioritise the management of the impact of the pandemic. Although this eases the administrative burden on companies it has the added impact of aging the information available to suppliers and insurers when assessing the financial health of a debtor.

Hans Meijer from Coface provides his comments on this change “In reality, this has made the assessment of credit lines much more complex due to no information being available, never mind lack of relevant information to current conditions and circumstances. As such, to still allow the flow of information and not to penalise businesses, a specific Covid19 questionnaire has been made available for buyers and clients to use.”

4. Additional Help for Businesses in Financial Distress

The first permanent change to the Act is the introduction of a moratorium. A moratorium aims to give companies in financial distress more time to review restructuring options without the threat of action by creditors. This is intended to reduce the number of companies entering insolvency due to the global pandemic. An insolvency practitioner is appointed to monitor the business with Directors continuing to run the company as trade continues. The Directors must confirm that the moratorium is likely to result in the restructuring of the company as a going concern. The initial period of the moratorium is 20 days, but this can be extended. While a company is in moratorium, there is a requirement for suppliers to continue to supply. The debtor also has an obligation to pay certain debts, including new debts.

5. Changes to Supplier’s rights to Terminate Supply

The second permanent change to the Act is the prohibition of termination clauses in supply contracts when a customer becomes subject to an insolvency or restructuring procedure. A supplier’s rights to terminate a supply contract are temporarily suspended if a customer becomes subject to insolvency regardless of whether the customer has breached its payment conditions. The supplier is also prevented from doing ‘any other thing’ to vary the terms of the contract.

Euler Hermes suggests that in practice the risk that this change poses to the supplier will be low. Under a moratorium, the debtor must continue to make payments for supplies as they are due, otherwise they are in breach of the moratorium. For administrations, liquidation, provisional liquidation or administrative receivership, payments for continued supplies are prioritised above unsecured and floating charge claims before the insolvency. For other insolvency proceedings, the aim is usually for the debtor to trade solvently through a restructuring or purchase of the business.

6. New Key Feature Introduced to Restructuring Plan

The final permanent change to insolvency law is the introduction of a new restructuring process which is intended to enable more insolvent and solvent companies to be rescued.  In a change to the current rules, the court can sanction a plan that binds creditors to a restructuring plan. The plan needs to be fair, equitable and in the interests of creditors. The plan is voted on by creditors but if certain conditions are met then the court can impose the plan on dissenting creditors. This is to ensure that a restructuring in the best interests of the company is not blocked by dissenting classes of creditors.

For advice on how these changes affect your credit insurance policy please contact us +44(0)1732 749750.

Sources:

Coface

Euler Hermes

Gov.uk

Post Date | December 3, 2020
Post Author | Hannah Lyon-Wall