What insolvency law changes mean for your business

Last week, the Corporate Insolvency and Governance Act received its final stamp of approval by the Government and became law.

The new legislation makes some permanent and some temporary changes to existing insolvency laws in the UK, with the aim of protecting and supporting businesses facing financial difficulty during and because of the COVID-19 pandemic.

If you’re a busy business owner or director and already struggling with information overload at this strange time, chances are you have neither the time nor the energy to sit down and scrutinise a lengthy legal bill.

So we have done it for you – this is what the new law means in practical terms for you and your business.

Breathing space from creditors

The new moratorium allows you as a director, with the assistance of an Insolvency Practitioner (IP) like ourselves to apply for a 20 day ‘pause’ on any legal action against your business. The moratorium is a rescue process, designed to save a viable company which is in temporary difficulties.

If your business is cashflow insolvent – in other words, temporarily unable to pay all debts which are currently due (perhaps because you have suffered a bad debt yourself) – then the new moratorium hits the pause button to give you time to form a plan and raise the cash.

The IP becomes the monitor of your moratorium and oversees the rescue plan of action. We can apply for an extension of a further 20 days if it becomes apparent that you need some more time to become cashflow solvent again.

It’s important to note that this is a permanent change to the law, and you can avail of a moratorium regardless of whether the coronavirus is the direct cause of your difficulties.

Certain exclusions apply to financial services companies.

Creditors can’t shut you down for unpaid bills

Statutory demands and winding up orders are temporarily suspended and all such requests issued since the crisis began will be voided.

Unlike the moratorium, the suspension of winding up petitions is a temporary measure and only applies where the debt problem is due to the COVID-19 crisis. A company therefore can bring a winding up petition to the court, but will have to demonstrate why they believe your inability to pay is unrelated to the pandemic.

If they can’t provide evidence of this which satisfies the court, your company is protected against the action and the petition request will not be publicised.

It’s important to note this measure does not apply to individuals – which includes sole traders – who can still be served with statutory demands and requests for bankruptcy.

Court support for rescue plans

The new restructuring measures make it easier for viable businesses to pay off debt obligations and stay open, by preventing a group of creditors from blocking a Repayment Plan.

Under the previous legislation, a struggling business would employ an IP to create a manageable debt repayment plan under the ‘scheme of arrangement’ procedure. It was a flexible tool, highly effective in allowing companies to pay back their debts in an affordable way and stay in business.

Its main drawback was the fact that one class (creditors were grouped together in ‘classes’ according to the size and type of debt) had the power to vote against the plan for any reason, even if overall, it provided a better financial outcome for all parties, and even if all other creditor groups owed money voted in favour.

Under the new law, a court can now bind creditors to a Restructuring Plan, if it is fair and equitable and in the interests of creditors. A good IP will always create a plan that represents the best overall outcome for all parties, so we believe this is a great move which should help more viable businesses to keep trading rather than being forced into Closure.

Directors protected from personal liability

The bill temporarily suspends wrongful trading, lifting some of the threat of personal liability from Company Directors.

Under normal legislation, a director who continues to trade a company knowing that it is or will be insolvent can face a claim of wrongful trading by liquidators and administrators. A successful claim against a director means they become personally liable for losses and debts incurred whilst trading and insolvent.

The threat of personal liability through wrongful trading has temporarily been lifted so that directors can continue to trade a company despite the uncertainty that the company may be insolvent in the future.

Although most industries have been given the green light to re-open as lockdown measures ease, social distancing requirements mean uncertainties remain for many. Rather than forcing businesses to close now to avoid wrongful trading claims, this allows directors to continue trading in an effort to remain in business.

As a company director, it means you can accept assistance such as the government’s Business Interruption Loan even if you can currently have no certainty about repaying it. Under normal legislation, you risked becoming personally liable for a debt like this.

All other directors’ duties remain in place and again, there are exclusions for the financial sector.

Keeping the supply chain open

If your business enters insolvency or restructuring procedures, suppliers can usually stop or threaten to stop supplying goods and services. They will normally have a termination clause in their supply contract which allows them to do this.

The new law prevents suppliers using contractual terms in this way to jeopardise the rescue of a business.

It’s another permanent change to the law, however it includes a temporary exemption for small suppliers during the pandemic. The supplier can also be relieved of the requirement to supply, either by direct agreement with the business, or by the court if it causes hardship to their business to continue to supply, so there are sensible protections in place for all parties involved.
Exclusions will apply to financial services firms and contracts, public-private partnership project companies, and utilities, communications and IT service providers who are already protected by existing legislation.

Flexibility on AGMs and meetings

The requirements around Annual General Meetings (AGMs) and other compulsory meetings are being relaxed temporarily, as social distancing requirements make many of these difficult if not impossible.

AGMs, which usually must be held in person and can have hundreds of attendees, can either be suspended or held remotely using technology such as video conferencing, with restrictions on attendees. All members must still have the ability to vote on measures.

The temporary measures will be in place until the end of September.

More time to file accounts

With necessary changes and delays to certain obligatory meetings, it makes sense to have temporary extensions to deadlines for filing accounts, confirmation statements (previously known as annual returns) and notices of relevant events, such as changes in Directors.

It’s worth noting that you can always apply to have your filing date extended if unplanned circumstances will prevent you from filing in time. However, if you have already requested such an extension, you may be ineligible for further extension under the temporary legislation.

 

All in all, the new legislation is great news for the companies and directors we work with and increases our chances of rescuing viable businesses.

Tools such as the moratorium and restructuring plan allow us to gain valuable breathing space for a company from its debt – space in which we can craft a solid plan to pay back debts in a manageable way.

Removing the threat of termination clauses and wrongful trading liability means we can help businesses to trade through this uncertain period, with careful planning and debt management, increasing the chances of bringing a viable business through the other side of this crisis.

Added flexibility around holding meetings and filing paperwork means directors aren’t faced with the added stressors of fines and striking off orders on top of the pressure of keeping the bills paid and staff safe as we emerge from lockdown.

If you have any questions about the new legislation and what it could mean for your business, give us a call. We’re happy to answer any queries you might have around debt, insolvency, and the coronavirus pandemic.

Give us a call on 0800 0465 029 or drop us a line to info@jtmaxwell.co.uk