Previous proposals were for an initial 28-day extendable period to allow time to put in place a plan to resolve trading issues but it remains to be seen whether the new legislation will extend this to cover the entirety of any ‘lockdown’ period. Act with caution if they begin to notice that their company is having financial difficulties. In addition, as the … Wrongful trading suspension 're activated' by UK Government leaving directors with a 2-month "gap" in protection during COVID 19 pandemic November 26, 2020 Today, new legislation comes into force* that provides directors of companies in financial difficulty with a second breathing space from the financial impact of the wrongful trading provisions. The Restructuring Plan is very similar in nature to the existing Scheme of Arrangement under Part 26 of the Companies Act 2006, adding the concept of cross class cram down to the basic cram down seen in Schemes. The cram down of creditor claims originates from the US Chapter 11 Bankruptcy process that is supervised by the Courts (and which is due to be replicated here via the Restructuring Plan) but at present a cram down is a more generalised concept for the forced imposition of restructuring proposals which often will compromise a creditors rights and/or debts even where a minority of creditors and/or shareholders have objected, such as with a CVA or Scheme. Employees are working from home, businesses are being forced to close their doors, and the government continues to roll out amended legislation to deal with the effects. Despite businesses and directors welcoming government schemes to help cash flow during the COVID-19 pandemic (see previous article from Patricia Grinyer on available funding), the availability of various forms of funding has raised a further question; whether directors should be taking on debt in such uncertain times? The new Restructuring Moratorium may be an essential tool for some of these businesses who need to ‘buy time’ to work out a temporary solution to their cash flow issues. The new changes will certainly help matters for some, the concern is whether they also make life more difficult for others. Third-Party cookies are set by our partners and help us to improve your experience of the website. This will be a brand new insolvency tool based on the existing scheme of arrangement in Part 26 of the Companies Act 2006 but with the ability to cross class cram down with Court supervision as opposed to the existing ability to cram down creditors of the same class. These Regulations temporarily suspend liability under wrongful trading provisions in the Insolvency Act 1986 (c. 45): specifically, section 214 (wrongful trading); and section 246ZB (wrongful trading: administration). The issues would appear better dealt with through the use of Court discretion, assisted by guidance which in the past has been aided through processes such as ‘Dear IP’ letters from the Insolvency Service providing guidance on how the Government wants the sector to approach such claims if the alleged conduct has arisen from a business severely hampered by COVID-19. The company creditors’ best interests come first. One of the changes that was announced is a temporary suspension of the wrongful trading provisions under s.214 of the Insolvency Act 1986 for a period of 3 months (back dated to 1 March 2020). The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020. Coronavirus (COVID-19): Click here to find out how we can help you and your company It would be surprising if a Restructuring Plan is implemented over the next few months for reasons specific to COVID-19 where the same result could not have been achieved through existing insolvency mechanisms. COVID -19 Restructuring/Insolvency & wrongful trading – Governmental update, Construction frameworks and facilities management, Partnerships and Limited Liability Partnerships, Employment contracts, policies and procedures, Management of trade disputes and industrial action, Disputed wills, trusts and estates solicitors, see previous article from Patricia Grinyer on available funding. If, after the company has gone into insolvent liquidation or administration, the court is satisfied that a director failed to comply with this duty, the court can order the director to make a compensatory payment for the benefit of creditors. Do not resign immediately if they become aware that insolvency cannot be avoided. The novel coronavirus is already creating significant health, social and economic challenges as governments around the world try to protect their populations and their economies. If they fail to take every step after this point to minimise any further potential loss to the company’s creditors. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). Further, the government are to rush through legislation to introduce the long awaited Restructuring Moratorium that will allow companies to file documentation at Court to immediately fend off creditor pressure. Whilst this has been discussed and consulted upon alongside the Restructuring Moratorium for some time, it is less clear whether this is a necessary tool to combat the financial implications of COVID-19 and whether it needs to be rushed through Parliament at this time. It appears that the sector merely needs government guidance on the interpretation of s.214(3) in relation to COVID-19, namely that in the event that a company has gone into insolvent liquidation as a result of COVID-19 and insolvency can be evidenced as a result, then the director can benefit from the existing defences. Once a view is formed that the company is insolvent, the focus of a director’s duties switches from acting in the best interest of the company and its shareholders to acting in the best interest of creditors. The government also needs to be cautious that in, rightly, seeking to protect businesses and their directors with these new measures that they do not increase the severity and impact of COVID-19 further down the supply chain. We do not want measures that could potentially push creditors into an insolvency process as a result of their inability to recover their debts, particularly those incurred pre COVID-19. Insights, events and opinions on the latest law, legislation and policies. Did you find this article informative? The defence to the claim is that the director took … The Company must be “prospectively insolvent”, i.e. In particular, directors may be considering what their responsibilities are if their company is experiencing difficulties, and may have in mind the provisions relating to wrongful trading. This suspension ended on 30 September 2020. Coronavirus: wrongful trading - a (bit. Now that directors are no longer protected by the suspension of the rules during this period of economic uncertainty, it is essential that they are aware of the steps they should be following should the business become insolvent. The suspension of wrongful trading laws and introduction of an immediate out-of-court moratorium present possible solutions to very real and immediate COVID-19 related problems. There are many risks involved with doing this and it can lead to a director being found personally liable. At the earliest opportunity raise any concerns about the company’s finances with their accountants or fellow directors. Whilst the Restructuring Plan will be a welcome tool and does seek to deal with certain issues lacking in the current UK insolvency landscape, it is not apparent that any of these issues are COVID-19 specific and therefore the question has to be asked … why now and why not after a fuller parliamentary debate can be concluded? When a creditor enforces their rights against the company, which is returned unsatisfied. The Wrongful Trading provisions allow for either an Administrator or a Liquidator (I will refer to them both as ‘office holder’) to pursue directors through the Civil Courts for a personal contribution towards the deficit arising to creditors in the insolvency of the company. It is unclear whether a previous proposal to exclude already insolvent companies will still apply in the current circumstances; The Company must have a genuine prospect of rescue; The Company must demonstrate that it has sufficient funds to carry on its business during the moratorium, meeting current and new obligations as they fall due. As such, directors should continue to seek advice on how to record their decision making throughout this period. This new tool will simply allow for groups of creditors that are pre-categorised to have their rights compromised (subject to minimum requirements), even if they have objected to the plan. These are as follows: i) restrictions on the ability to present winding up petitions and to make winding up orders for a set period; ii) suspension of liability for wrongful trading during a specified period; iii) power to amend insolvency law to mitigate the effect of the coronavirus. 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