• Gavin O'Brien

Insolvency and Covid-19: New Rules Explained

Some important changes to the insolvency rules came into force on 26 June, designed to offer extra protection for companies struggling with the impact of coronavirus.


The Corporate Insolvency and Governance Act includes the following measures:

  • A new moratorium tool: This prevents legal action being taken against companies for a limited period, giving them time to attempt a rescue or debt restructure.

  • A new restructuring plan: For the first time in English law, this includes so-called ‘cross-clam down’ procedures: i.e. a class of creditors can now be bound by the restructuring plan even if they do not agree with it.

  • Restrictions on supply contract termination: This is designed to prevent suppliers refusing to supply companies that are going through an insolvency or restructuring procedure.

  • Temporary suspension of wrongful trading rules: This is meant to give directors greater breathing space to trade, without risk of incurring personal liability.

  • Temporary prohibition winding up petitions: where those petitions are based on unpaid debt incurred as a result of the pandemic.

  • Temporary company filing and governance rules: This includes a relaxation of the rules relating to AGMs and an extension to the account filing deadline for public companies.

Here’s a closer look at the key provisions…


The new moratorium


This is a tool that directors can put to work to gain some breathing space from creditor action and formulate an action plan for recovery and explore rescue options.

Here’s how it works in brief:

  • The moratorium is obtained through a court application.

  • An insolvency practitioner acts as a “monitor”, overseeing the arrangement. Throughout the procedure, the monitor must remain of the view that company rescue is possible. If not, the moratorium must come to an end.

  • The moratorium gives the company 4 weeks (20 business days) protection. During this time, creditors (e.g. trade creditors, lenders and landlords) are barred from bringing insolvency and other proceedings for unpaid amounts. Landlords are also unable to forfeit leases during this period.

  • The moratorium can be extended for a further 20 business days without the consent of the creditors. It can be extended for longer with the consent of pre-moratorium creditors and/or with permission of the court.

Restructuring plan


The new law amends the Companies Act 2006, to add a new restructuring tool, referred to as a restructuring plan. The restructuring plan is actually similar to the existing ‘scheme of arrangement’, whereby a company can apply to the court to summon a meeting of creditors to work out a plan, followed by a further application to court to sanction the plan.


The big difference is the possibility of the court “cramming down” non-consenting classes of creditors. Dissenting creditors who vote against the plan will be bound by it if it is sanctioned by the court.


As an alternative to the existing scheme of the arrangement, the restructuring plan looks like a slightly easier way of overcoming the objections of certain creditors.


Supply contracts


Under the new law, a supplier cannot stop (or threaten to stop) supplying a company solely because the company is going through an insolvency or restructuring procedure. Also, a supplier cannot require pre-insolvency debts to be paid as a condition of fulfilling further orders.


It’s a welcome move, designed to prevent problems with suppliers from jeopardising companies’ rescue plans.


Suspension of wrongful trading rules


Wrongful trading describes the situation where directors continued to trade when:

  • they knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation, and where...

  • they did not take “every step with a view to minimising the potential loss to the company’s creditors”.

Ordinarily, directors found guilty of unlawful trading can be held personally liable for the company’s debts from the point in time when they knew the company was effectively insolvent.


The new Act temporarily suspends this provision. The court will assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the period from 1 March 2020 until 30 September 2020 (there is also scope for the government to extend this period if it sees fit).


Uncertainty is a fact of life at present, with trading conditions potentially looking very different from one week to the next. This measure potentially gives directors greater scope to continue to operate while they seek to understand and react to what’s happening on the ground, without the risk of being held personally liable for any worsening of the company’s financial position.


Temporary prohibition on winding up petitions


If a creditor is owed £750 or more and can prove that the company cannot pay, that creditor can apply to the court to close (i.e. ‘wind up’) the company. It’s meant to be a route to go down when other methods have failed. Trouble is, some creditors often treat it as a routine debt collection tool, to be threatened or applied for at even the slightest hint of a payment problem!


Under the new Act, creditors are prohibited from presenting a winding up petition on the basis of an unsatisfied demand between 27 April 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that:


i) coronavirus has NOT had a financial effect on the company, or

ii) the company would have been unable to pay its debts even if coronavirus had not had a financial effect on it.


The measure is designed to prevent creditors aggressively pursuing a winding up order instead of seeking to reach an agreement with the other party.


Taken as a whole, the measures in the Act go some way in widening the options available to struggling companies. That said, what they do NOT provide is a ‘free pass’ to avoid creditor action until coronavirus is over.


If your company is experiencing financial problems, it’s vital to seek professional guidance at the earliest possible stage - and while all possible options are on the table. Working with insolvency practitioners, solicitors and other professionals, North London accountants MJH Accountancy are on hand to provide whatever help you need to get through difficult times. This can include (but is not limited to) helping to create revised business plans and forecasts, preparing paperwork in support of loan applications, as well as assistance with business restructuring.


For an informal chat, speak to us today.

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