Two weeks have passed since the Business Secretary, Alok Sharma, announced new insolvency measures to help businesses hit by the coronavirus crisis. Legislation was promised “at the earliest opportunity” but is yet to be published, whilst parliament is currently on Easter recess and won’t sit again until 21 April.
We do know that that the changes are likely to be based on reforms previously proposed in 2018 as part of the government’s consultation on Insolvency and Corporate Governance. At present, there’s little technical detail available on how the reforms will work, but the proposals are as follows:
- The temporary suspension of wrongful trading provisions. This will be applied retrospectively from 1 March 2020.
- A short moratorium for companies, giving them a breathing space from creditor action whilst they consider their options for rescue or restructure. If the reforms follow the 2018 proposals, this moratorium could be available for an initial period of 28 days, with the possibility of being extended for a further 28 days. During the moratorium, the directors would remain in control of the company. Creditors’ interests would be protected through the involvement in the process of an authorized supervisor who would monitor the company throughout the moratorium. The moratorium would be triggered by filing a notice at court alongside the supervisor’s consent to act. The 2018 proposals suggested that a company would not be able to use the moratorium procedure if it was already insolvent; the financial test would be that it would become insolvent if action was not taken.
- Allowing companies continued access to their supplies (such as raw materials, component parts etc.) so they can continue to trade during the moratorium.
- A new restructuring procedure that would allow a company to bind all creditors to the plan, even if some vote against binding creditors to that plan.
The proposed changes were said to include safeguards to ensure that creditors and suppliers were paid while a solution is sought.
Given the current position, there is an urgent need for draft legislation to be published in full. Whilst a new moratorium procedure is welcomed, the legislation must provide the necessary protections to ensure that creditors are protected and that the procedure cannot be open to abuse.
