Legal Protection for struggling businesses

Dear Members,

There is some new legislation released into parliament for debate. It deals with a range of protections for businesses and Directors looking to survive through the Corona Crisis.

You, if I may presume, should be aware of these implications, because they could effect your longer term decisionmaking.

Our thanks to Chamber Ambassador Alan Clark for the information

Nick

Corporate Insolvency and Governance Bill

 

Some good news for directors and companies in trouble

On Wednesday 20 May 2020 the Corporate Insolvency and Governance Bill was introduced into Parliament for debate. It brings in two new tools to help rescue companies, as well as temporarily restraining enforcement procedures by creditors. Also on the books is the temporary suspension of director’s liability for wrongful trading during this difficult time.

New Company Moratorium

The Bill introduces an initial 20-day moratorium for viable businesses. This can be extended by directors, the court or creditors. During the moratorium a licenced insolvency practitioner will act as the Monitor. His job is to make sure the company will emerge after the moratorium as a going concern. So for example, where a company has restructured its debts with the agreement of creditors, the company would continue as a going concern.

The aim of the moratorium is to protect the company from creditor action, and so it will restrict most legal processes, including administration appointments, as well as various enforcement procedures. If the directors or the monitor realise that a rescue is not possible, the directors can apply for administration or take steps to place the company into liquidation.

During the moratorium there are restrictions on the company – it cannot grant security without the Monitors consent and credit for more than £500 cannot be obtained without informing the lender that the moratorium is in place.

Criminal offences are introduced for Directors making false representations to obtain a moratorium, and committing, or being privy to, a fraudulent act in relation to the company’s property at any time in the year prior to the commencement of the moratorium.

New Restructuring Plan

This new tool is modelled on the existing scheme of arrangement but incorporates the US Chapter 11 idea of being able to ‘cram down’ classes of creditors. For example, these classes could include the landlords of shops being shut, unwanted premises, surplus employees, or other specific groups. Unlike a Company Voluntary Arrangement, it will bind both secured and unsecured creditors.

Companies that anticipate trading difficulties, either now or in the future, may propose a Restructuring Plan. A compromise or arrangement can be put to creditors, or any class of them, or members. The plan would aim to eliminate, reduce or prevent, or mitigate the effect of the financial difficulties the company is experiencing.

Creditors will vote on the plan in separate classes which is similar to a scheme of arrangement. Approval will require a minimum of 75% in value of each class of those voting. The plan will be sanctioned by the court, even if there is a small group of dissenting creditors who vote against it. The ‘cram down’ measures mean the court will be permitted to sanction the arrangement on the basis that the dissenting creditors will be no worse off than they would be in the event of a relevant alternative.

Winding-up petitions

The Bill includes temporary provisions to restrict the use of statutory demands and petitions being issued during this difficult time – where the debt is unpaid for reasons related to Covid-19.

Retrospective legislation is being introduced so that a petition cannot be presented by a creditor during the period starting on 27 April 2020 until 30 June 2020. There is an exclusion where the creditor has reasonable grounds for believing that Covid-19 has not had a financial effect on the company or, indeed, that the facts would have arisen in any case were it not for the Covid-19 pandemic. Furthermore, this temporary prohibition does not prevent the presentation of a winding-up petition by the directors, or on the grounds of public interest by the Secretary of State.

The meaning of ‘financial effect’ is that the coronavirus resulted in, or related to, the debtors worsening financial position. In order to cover the retrospective application of this new law, where a winding-up order has been, which would not have been made had the provisions of the Bill been in force, that order will be deemed void.

Significantly, and contrary to recent judgements, this prohibition extends to all companies in respect of all debts and not just rent arrears in the retail, hospitality and leisure sectors.

Also of note, where a winding-up order is made by the court (as permitted by the new provision), the commencement of the winding up will be from the date of the winding-up order, rather than the date that the petition was filed.  This means that dispositions of company assets made after presentation of the petition up to commencement of the winding up order will not be deemed void.

Suspension of liability for wrongful trading

The Insolvency Act 1986 provided protection for creditors by imposing personal liability on directors where a company had continued to trade beyond the point where there was no reasonable prospect of the company avoiding insolvency.

The Bill provides a temporary suspension of these provisions whilst directors do their best to trade a struggling company through the early part of the Covid-19 pandemic. The relaxation of the wrongful trading rules applies to the period 1 March to 30 June 2020. Note that all other directors’ duties to creditors and the company during this period will continue to apply. The Bill will not prevent liquidators or administrators from bring claims against directors for breaches of duty and misfeasance. As always, directors should talk to their trusted advisors when tackling difficult situations.

Annual General Meetings

Whoopy. The Bill allows annual general meetings to be held online so that shareholders don’t have to fret about travel and social distancing. Alternatively, companies will have the option to delay their AGMs until late September 2020. There are also provisions which permit the Secretary of State to make extensions for filing deadliness at Companies House, such as notices of a change in registered office address or changes in directors.

The Bill is expected to be approved and brought into law very quickly. We think the new moratorium, combined with a Company Voluntary Arrangement or the new Restructuring Plan will prove very useful in helping businesses deal with the debts built up during the pandemic.

If you have clients who need help please get in touch.

Alan Clark
01707 448100
alan.clark@carterclark.co.uk

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