To assist businesses dealing with the economic impact of the coronavirus
(COVID-19) pandemic, on March 28, 2020, the UK government followed in the
footsteps of countries including Spain, Germany and Australia and announced
certain changes to UK insolvency law.
This article summarises the key changes the UK government is proposing to
existing insolvency laws, and considers the key restructuring tools
available to assist companies during this unprecedented and challenging time.
Wrongful Trading Suspension
The current position under UK law is that a director can incur personal
liability for a company’s debts if they fail to take every step that a
“reasonably diligent person” would take to minimise potential losses of
creditors once they are aware that there is no reasonable prospect of the
company avoiding insolvent liquidation. Ordinarily, in the currently
uncertain climate, this would put company directors under pressure to file
for an insolvency process such as administration.
In the wake of weeks of disruption due to the pandemic crisis, and with the
aim of “giving bosses much-needed breathing space”, Business Secretary Alok
Sharma announced a temporary suspension to wrongful trading provisions,
dating retrospectively from March 1, 2020, for a period of three months.
The government has the power to extend this suspension if necessary.
Those dealing with potentially insolvent companies will need to be extra
cautious, however, as they will be exposed to the increased risk that a
company that previously would have been forced to cease trading may
continue to operate as a result of these measures.
Existing fraudulent trading and director disqualification rules will,
however, continue to apply, which the government believes will act as an
effective deterrent against director misconduct. Company directors should
therefore take care not to fall afoul of the rules by, for example,
deliberately misleading suppliers or customers about the solvency of their
business. The suspension of wrongful trading provisions should not be seen
as a “get out of jail free” card for any steps taken to keep companies
afloat during the coronavirus crisis.
New Moratorium and Restructuring Plan
In addition to the wrongful trading suspension, the UK government announced
that it will fast-track legislation to implement plans consulted on in
August 2018. These changes will introduce a number of new restructuring
tools, including the following:
- A new moratorium to give companies that are distressed but financially
viable a period of time in which creditors cannot take action against them,
allowing them to commence restructuring or procure investment. Whilst the
precise length of this moratorium is currently unclear, the UK government
previously expressed support for an initial period of 28 days with scope
for extension where there remains a good prospect of achieving a better
outcome for creditors than would otherwise be possible. It remains to be
seen whether legislation will clarify who will assess and how assessments
will be carried out to determine whether a company remains financially
- A prohibition on suppliers exercising termination rights in contracts for
the supply of goods and services on the grounds that a counterparty has
entered a formal insolvency procedure, the new moratorium or a
- A new restructuring plan including a “cross-class cram-down” provision,
under which a company can bind dissenting classes of creditors.
When implemented, this legislation will introduce protections for
businesses that could prove vital to their continuing survival in the
current market climate. However, it will also introduce greater risk and
uncertainty for third-party creditors and suppliers who may, as a
consequence, look to scale back their exposure to an individual business.
The government has said it will introduce the legislation “at the earliest
opportunity.” At present, Parliament is due to return from recess on April
21, 2020, though whether this is possible remains to be seen.
Throughout the COVID-19 outbreak, it is essential that businesses stay
close to their lenders, keep them abreast of any issues they encounter, and
enter into a discourse with them as early as possible if the need for
support arises. Along with exploring the possibility of payment holidays
with their lenders, businesses should make full use of the support offered
by the government during these troubling times to safeguard their
continuing financial health. For assistance or information, please review
various packages of business support
announced by the government.
UK Restructuring Tools
Despite the proposed changes detailed above, businesses should be aware of
the other restructuring tools that exist to assist them in navigating the
current market turmoil. The following considers a number of these.
Scheme of Arrangement. A company can enter an arrangement with its creditors under this
formal statutory procedure. Such schemes are flexible, and almost any
kind of compromise can be agreed, provided the correct approvals are
obtained. The two key requirements for such approval are (i) at least
50 percent in number constituting 75 percent in value of each relevant
class of creditors voting in favour, and (ii) the delivery of a
sanction order by the court.
“Pre Pack” Administration.
This occurs when the sale of a company’s business and/or assets has
been arranged in advance of administration being entered, with the sale
taking place almost immediately after the company is placed into
administration. A key feature of a pre-pack sale is that unsecured
creditors will have no say in the process, whereas secured creditors
will likely be involved as their consent will be required to release
secured assets. To protect unsecured creditors, administrators have a
statutory duty to disclose various pieces of information to provide
reassurance that the interests of all creditors have been considered.
Company Voluntary Arrangement.
Here, a company and its creditors come to an agreement, which is then
implemented under the supervision of an insolvency practitioner. To be
approved, a majority of 75 percent or more in value of the creditors
must vote in favour of the proposals, which must not include more than
50 percent of creditors connected with the company.
Chapter 11 of the U.S. Bankruptcy Code. Companies with a U.S. parent, assets or other nexus can utilise s.363
of the U.S. Bankruptcy Code. This permits a company to sell its assets
outside of its ordinary course of business, backed by a court order,
where the bankruptcy process has already been initiated. The proceeds
of such sales will then be used to pay its creditors. The prescribed
procedure includes a competitive bidding process, in which company
creditors have the ability to submit a “credit bid” that offers to
cancel some or all of the debts owed to them in exchange for assets.
It is worth noting that “credit bidding” is permitted in England and Wales,
though there is no specific legislation on this point, meaning that any
such sales will not be sanctioned by the court. Therefore, whether a
particular deal is in the best interests of the creditors will be at the
discretion of the insolvency practitioner.
Please contact any of the authors of this briefing or your regular
McGuireWoods contact if you have questions or would like assistance with
the impact of COVID-19 on your business.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.