May 28, 2020
Emergency changes to insolvency law
In a landlord and tenant relationship, the insolvency process has in the past often been used as an effective debt recovery tool. However, on 20th May 2020 the government published the new emergency Corporate Insolvency and Governance Bill to temporarily protect companies and directors who are currently facing trading difficulties due to the coronavirus. This article looks at the proposed changes and the implications.
The government will fast-track the bill and is aiming for Royal Assent in June 2020.
A moratorium on the insolvency processes
A new temporary moratorium is proposed for businesses that are, or are likely to become, unable to pay their debts, where an insolvency practitioner will certify that in their view it is likely that a moratorium would result in the company being rescued as a going concern. This is essentially the adjournment of all winding up petitions with the process overseen by a licenced insolvency practitioner.
It will last for an initial period of 20 business days but may be extended: (a) without creditor consent for a further period of 20 business days, or (b) with creditor consent or by the court for up to a year or more. During this time a company cannot be put into administration or liquidation by creditors and the board would retain control of the company throughout the process.
It should be noted that during the moratorium limits are imposed on how much the company can pay a creditor to avoid preferences and the disposition of property is restricted.
A new restructuring plan procedure
The intention is to allow time for the directors to formulate proposals to restructure their business. This is procedurally similar to a scheme of arrangement, allowing solvent and insolvent companies to propose a plan to creditors. The details are to be inserted into the Companies Act 2006 after the current schemes’ provisions.
Such plans must be approved by at least 75% in value of voting creditors in each class. These voting thresholds are also subject to provisions allowing, in certain circumstances, for the court to confirm a plan even where a class of creditors has voted against it.
There are also certain provisions that apply for the period between 1st March 2020 and the later of 30th June 2020 or one month after the Bill comes into effect (known as the ‘Relevant Period’):
(i) Invalidation of contractual termination clauses
The Bill also invalidates the termination or variation of contracts (for goods and services) triggered by a company's entry into insolvency proceedings. This means that a company can continue to access supplies and raw materials. However, while the company will not be required to pay outstanding amounts due for past supplies, it is required to pay for any supplies made post-insolvency.
This will apply whether termination is deemed to happen automatically or at the election of the solvent counterparty. It will only have effect in insolvency proceedings commencing on or after the date the Bill is brought into force.
(ii) Restriction of debt-related winding-up petitions
This is the last of the provisions relating to companies themselves. No winding-up petitions can be presented on the basis of a statutory demand served during the Relevant Period.
Further, no winding-up petitions can be presented during the Relevant Period on the grounds of an inability to pay debts, unless the creditor has reasonable grounds for believing that the coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway. Notably, this legislation applies to all winding-up petitions and not just those issued by landlords in respect of rent arrears as previously implied by the government.
We expect that any winding petition that has been made during the period will be automatically void, and in the event that the petition is pending once the Bill is entered, the court will have discretion to stay the petition.
(iii) ‘Wrongful Trading’ suspension for directors
The government is also offering a temporary concession to directors of companies.
The law which penalises directors of companies from wrongful trading will be retrospectively suspended. In a previous briefing note, we had said that tenants need to be careful in how they managed their company and what they say to their landlord about insolvency. This is because directors are obliged to wind up a company if it is trading insolvently. Essentially if the directors allow the company to trade after the point at which they know or ought to know that the company has no reasonable prospect of returning to solvent trading, then they can be held personally liable.
This change in the law means that the Relevant Period is ignored when deciding on compensation for wrongfully trading. The move will allow directors to pay staff and suppliers even if there are fears that the company may become insolvent, and importantly the directors will not be personally liable for trying to survive the period of the UK's lockdown.
Directors of businesses that were in financial distress prior to the Covid-19 should note that the proposed emergency changes to the insolvency regime are unlikely to be relevant to them. Also, directors will still be personally liable for other offences under the Insolvency Act 1986 - rules on fraudulent trading and disqualification are unaffected.
Landlords’ and tenants’ position
Previously, if a tenant did not pay its rent then it was a good indication that the company was insolvent or near to insolvency. However, at the moment this is not necessarily the case. If the tenant is not trading, or its trading is impacted by Covid-19 as many businesses have been, then its cash flow is likely to be severely impacted. The business may still be viable once lockdown eases and it may also have received the benefit of a grant as well as government supported loans.
Taking insolvency action always involves an element of brinkmanship. In any circumstances, if a tenant does not, or cannot, pay its rent and is forced into insolvency, the landlord could be left as an unsecured creditor and may see little or no recovery of the debt. In this current climate, it has become even more difficult for the landlord.
If tenants or landlords are facing insolvency, they should take advice at an early stage to establish whether there is a solution or action should be taken to minimise the damage, impact upon employees, shareholders and the personal liability of directors.
Carry on regardless
It should be remembered that there will be no relaxation to directors’ fiduciary and statutory duties to the company and/or its creditors in the meantime, nor to the rules on fraudulent trading. Also, having a period of suspension may cause administrators and liquidators to look more closely at whether the directors ought to have ceased trading before and immediately following the lifting of the lockdown.
So, while the latest proposals will be welcomed by debtors, including tenants, we would not expect companies to change their strategies and approach to the current environment. The future viability of the company should be kept under consideration at all times - but the emergency legislation will at least provide some breathing space.
If you require advice on the above issues or any real estate, insolvency or disputed debt matters, please contact:
Edward Jones Mobile: 07876 255398 Email: email@example.com
Jeff White Mobile: 07807 131216 Email: firstname.lastname@example.org
Sandra Rankine Mobile: 07725 407685 Email: email@example.com
This note was written on 28th May 2020. This content is provided free of charge for information purposes only. Events are moving fast, and the law and its interpretation are changing rapidly. This note does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the author or Elliott Matthew Ltd.
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