COVID-19 Business Support: Relief through Insolvency Law Changes

Insolvency Law to create breathing space

Announcement

Business Secretary Alok Sharma announced on Saturday 28 March 2020 that insolvency law will be amended to give companies breathing space and keep trading while they explore options for rescue. Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity.

The measures announced include:

• the introduction of a new moratorium to help business rescue. This will give those financially distressed companies which are ultimately viable a period of time when creditors (including secured creditors) cannot take action against the company, allowing it to make preparations to restructure or seek new investment;
• prohibition of enforcement by a supplier of termination clauses in contracts for supply of essential goods and services on the grounds that a party has entered a formal insolvency procedure, the new moratorium or the new restructuring plan;
• creation of a new restructuring vehicle that would include the ability to bind dissenting classes of creditors who vote against it; and
• temporary suspension of the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency, without the threat of personal liability should the company ultimately fall into insolvency. Existing laws for fraudulent trading and the threat of director disqualification are to continue to act as an effective deterrent against director misconduct.

The detail

The measures to create breathing space for businesses will require detailed legislation setting out how they will work. Those details are yet to be published.

Some insight is available from the government consultation and response on a review of the corporate insolvency framework produced in 2016 and 2018. This deals with the new moratorium, termination clauses and the new restructuring mechanism. Temporary suspension of wrongful trading is a new proposal.

Next Steps

Our Corporate Restructuring and Insolvency Team, who are specialists in advising on response to a financial crisis. They will advise on and use existing tools and, when they are introduced, these new measures.

If you require advice on any of the issues raised in this article, please contact one of our Corporate Advisory partners.