Emergency changes to UK insolvency law?
The impact of COVID-19 on businesses and individuals is already enormous. There has been a huge reduction in demand for non-essential goods, hospitality and transportation. Recent days have also seen plunging capital markets, the potential for companies to ‘furlough’ employees and a slowdown of international trade transactions. Not surprisingly, there is the looming prospect of vast number of corporate and individual insolvencies.
In response, central banks and governments across the globe have started to put in place legislative measures to further support businesses and mitigate the economic disruption.
It has been reported in the last few days that papers have been submitted to the Government urging implementation of emergency reforms to the UK’s insolvency laws. The Insolvency Service has started canvassing views amongst insolvency practitioners and restructuring professionals about urgent changes to existing legislation. Potential short term measures could include changes to insolvency laws, corporate governance, and directors’ duties.
It is understood that some of the reforms that have been called for from the UK Government include:
- Temporary suspension on winding-up petitions, by unsecured creditors, against companies by way of a 90-day grace period triggered by directors;
- A moratorium and suspension on rules on wrongful trading to help protect directors from personal liability; and
- An extension to the 10-day moratorium period created when a company or its directors file a Notice of Intention to Appoint Administrators.
Other measures that are being considered could include:
- A wider moratorium to prevent enforcement by all creditors, including secured creditors; and
- The introduction of a ‘short form’ CVA, to remove some of the regulatory burden and reduce costs.
The changes being considered in the UK appear to be similar to changes already being implemented in other jurisdictions with Governments in Australia, Germany and Spain all having made a number of changes to their insolvency laws to support otherwise viable businesses suffering financial distress during the COVID-19 crisis.
On 23 March 2020, Australian Federal Government made changes which are contained in Schedule 12 to the Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) (the Bill). Main changes include:
- Directors will be temporarily relieved from the risk of personal liability for insolvent trading (similar to wrongful trading in the UK), where the debts are incurred in the ordinary course of business. Temporary relief will operate for a period of six months;
- The minimum threshold at which creditors can issue a statutory demand has increased from $2,000 to $20,000 for a period of 6 months, and companies will have 6 months to respond to a statutory demand rather than the current 21 days;
- A holding company may rely on the ‘temporary safe harbour’ for insolvent trading by its subsidiary, under certain requirements; and
- The threshold for a creditor to initiate bankruptcy proceedings against an individual has increased from $5,000 to $20,000. Debtors will have 6 months (rather than the current 21 days) to respond to a bankruptcy notice.
For more details on emergency laws in Australia in the context of COVID-19, please read this guidance document.
The German Federal Government is currently working on a new law for the mitigation of the consequences of the COVID-19 pandemic in the area of insolvency. Those will reflect the proposal made in the course of 22 and 23 March 2020. The proposed legislation covers:
- Suspension of the obligation to file for insolvency until 30 September 2020 (although the suspension shall not apply if the insolvency is not caused by the effects of the spread of the COVID-19);
- Ensuring that management can continue to run businesses in the ordinary course;
- Incentives to continue to do business with the affected companies;
- Reducing the legal risks in connection with the provision of new financing during the crisis; and
- Reducing claw-back risks for contractual counter-parties generally.
For more details on emergency laws in Germany in the context of COVID-19, please read this guidance document.
The Spanish government has enacted a series of measures in Royal Decree-Law 8/2020 ("RDL 8/2020") and other pieces of law including Royal Decree 463/2020. The main changes in the context of insolvency and restructuring are:
- Directors can still file for the formal insolvency of a company, but the obligation for them to file within two months is disapplied.
- A third party may still file for insolvency, but the third party filing will not be processed until two months after the end of the ‘State of Alarm’ (the State of Alarm that was declared on 14 March 2020).
- Additional breathing space for businesses in difficulty to facilitate the negotiation of a restructuring between the borrower and its financial lenders
For more details on emergency laws in Spain in the context of COVID-19, please read this guidance document.
Where next for the UK?
It seems increasingly likely that changes to the UK insolvency legislation will be introduced in the coming days, incorporating some of the changes that have already been put forward. The key underlying theme, not just in the UK but worldwide, is to temporarily assist companies to continue trading, and prevent individuals going bankrupt, through the current period of disruption.
Whilst these measures will give temporary breathing space, businesses and directors will have to make plans now on how to meet their obligations when the temporary measures come to an end. The new changes may also make it difficult for creditors to recover late payments, which could ultimately increase credit risk.