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Will the UK's new insolvency measures help companies affected by coronavirus?

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United Kingdom

Provisions to protect companies and their directors from creditors may be of little benefit if they require businesses to have sufficient cash to keep trading.

  The UK government stated on 28 March that it will:
 
Make changes to enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency.
 
This will also include enabling companies to continue buying much-needed supplies, such as energy, raw materials or broadband, while attempting a rescue, and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability.
 
The full text of the announcement can be accessed here.
 
The business community is waiting to see the detail of these changes, but it looks like this means the government will:
 
  1. Introduce a moratorium
The government could introduce a moratorium provision, that has been discussed and consulted on by the government for a few years.
 
The moratorium would be supervised by an insolvency practitioner, but the debtor company would remain under the control of the directors.  
 
However, the company needs sufficient cash to keep trading through this period, so it is unclear how much it would help. 
 
The length of the potential moratorium is also undefined, but will most probably be between 28 days and three months.  
 
The moratorium is likely to be obtained by e-filing documents at court, with some qualifying criteria that the insolvency practitioner will have to agree are present (e.g., that it has sufficient cash to trade for the moratorium period).  
 
The moratorium is likely to be the same as an administration moratorium, so will prevent the enforcement of security or presentation of a winding up petition (unless the court gives permission).
 
 
  1. Exclude ipso facto clauses
The government could also introduce a new provision to exclude “ipso facto” clauses, i.e., clauses that permit stopping further provision of supplies because the debtor has entered an insolvency process.  
 
It remains to be seen what supplies will be caught by these provisions.
 
Again, this will most likely require the company to have sufficient funds to pay for new supplies, so it is not obvious how much it will help.
 
 
  1. Suspend wrongful trading rules
A temporary suspension of wrongful trading provisions from 1 March until 1 June has been mooted.
 
Presumably, this means additional debts incurred during that period would not form part of any award against the directors for wrongful trading, but the directors could still (separately) be sued for breach of duty. 
 
Realistically, it is unlikely that liquidators will sue directors for taking time to understand the government's measures before acting.
 
If you have any questions or concerns about insolvency processes during the coronavirus crisis, our restructuring and insolvency team is able to provide further specific advice on all of the issues raised in this article.
 

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