Nicola Ross

The Corporate Insolvency and Governance Bill was read in UK Parliament at the end of May and is likely to be welcomed by many struggling businesses which are facing potential insolvency due to coronavirus. The bill aims to stop the expected tidal wave of insolvencies and provides reassurances and protections, however businesses facing potential insolvency will still need to tread carefully.

The bill suspends provisions around wrongful trading from at least 1 March to 30 June. Under the old wrongful trading provisions, directors faced personal liability on debts incurred by their company when they have continued to trade knowing that the company was unlikely to avoid going into insolvent liquidation. For directors who may have previously rushed to liquidate their businesses with these provisions in mind, this suspension should help delay that process.

However, this bill does not take away other obligations on directors. Directors still have duties under the Companies Act and need to act in the best interests of creditors if they think their company is in an insolvent position. With a careful line to tread, directors will still need to think very carefully about whether to continue to trade their business if there is not a reasonable prospect of avoiding liquidation.

Winding up petitions have also been temporarily restricted by the bill, likely in response to some landlords who have reportedly tried to circumvent restrictions placed on normal lease termination due to coronavirus by using insolvency processes. The bill will take away the ability to use some of these tactics and creditors will be required to have a reasonable argument that shows that the company’s inability to pay is not due to coronavirus. For businesses that have become unable to pay their debts during this time, the bill offers protection which is likely a welcome development for hospitality and retail sectors in particular.

Another major, and this time permanent, change is a new, standalone moratorium which is intended to give struggling companies breathing space to try to turn their businesses around. Unless the court expressly allows otherwise, the moratorium will essentially suspend a variety of creditors’ abilities such as chasing debts through the courts or enforcing securities for as long as the moratorium is in force. To qualify for the moratorium businesses will need a qualified Insolvency Practitioner (IP) to act as “monitor” who must take the view that the moratorium will help rescue the company.

Creditors may be worried that such a moratorium will be subject to abuse. However, there are safeguards. As monitor, the IP is required to assess - throughout the moratorium- whether rescue of the company is likely. The monitor also has a high degree of control over which debts can be paid and which property can be sold. If creditors aren’t happy with the decisions the monitor has taken - including allowing the moratorium to continue – then they can apply to court. And, of course, if the company can be turned around then the creditors will still have a company to trade with on the other side.

Nicola Ross is a partner at Morton Fraser