Directors in financially stressed businesses still face risks, despite the anticipated government support measures
30th April 2020
Greg Palfrey, National head of Restructuring Recovery Services at Smith & Williamson, the financial and professional services group, anticipates government changes to insolvency laws intended to help businesses in financial trouble and explains why individual directors need to be careful.
On 23 April 2020, the Business Secretary announced further changes to insolvency law designed to protect businesses affected by Covid-19 from action by landlords in response to what has been described as “aggressive rent collection”. Alok Sharma has confirmed that legislation will shortly be implemented to:
- temporarily cancel the use of statutory demands and winding up petitions; and
- significantly limit the availability of the Commercial Rent Arrears Recovery regime.
This announcement follows earlier news of some notable changes to insolvency laws, including a change designed to remove the threat to individual directors of personal liability for ‘trading while insolvent’ during the pandemic. The government has done this by suspending the wrongful trading provisions of the Insolvency Act. This is effective from 1 March 2020 and legislation will be introduced as soon as possible.
Directors need to treat this relaxation of the rules with caution and be clear about the difference between this and carrying on business recklessly. Other legal risks still remain for them if the business should eventually fail, for example in relation to misfeasance, preferences and transactions at undervalue. Disqualification remains a risk for all directors in cases of misconduct and they should get professional advice if they are in any doubt about their situation or their actions.
What are the other new insolvency measures likely to cover?
Currently, there is little technical detail available on the new insolvency measures. However, in August 2018, the government announced plans for new restructuring procedures, and it seems that these may now be fast-tracked. As so few details have been announced we cannot be certain as to what will be in the measures, but here is what we anticipate.
We believe that they are likely to incorporate the availability of a 28 day moratorium. It is anticipated that companies in financial distress will be able to take advantage of this to give them breathing space while they explore options for business restructuring and/or rescue. This new moratorium is likely to mirror the existing administration moratorium and so provide comprehensive protection from creditor enforcement and other legal actions against the company and its property.
Exiting the moratorium is expected to be done by starting either an informal restructuring arrangement with creditors or through a formal insolvency procedure, such as a company voluntary arrangement, an administration or a scheme of arrangement. Businesses will want to seek their own professional advice about these different options and what they each mean before committing to anything.
Getting the right support
A specialist insolvency practitioner would be appointed to monitor and oversee matters during the moratorium to make sure that creditor interests are also protected. The moratorium will only be available to companies that are still viable and can demonstrate that they have sufficient funding to meet their ongoing trading costs during the moratorium period. Producing proper cash flow plans and forward planning would be a key part of this. Again, professional help can enable businesses to best manage their cash and work out their funding streams, as well as identifying their best trading options.
Continued access to supplies
During the moratorium, a business in financial distress will be able by law to maintain continued supplies of essential goods and services, such as raw materials and parts, so that they can continue to trade. If so, it will be interesting to see how suppliers will be made to fulfil orders to a business where they know they may not get paid for previous supplies. In practical terms, this may be difficult to enforce. We expect that suppliers will want to be paid in advance during the moratorium.
A new restructuring plan
We believe the anticipated new restructuring plan will be modelled on the existing legal ‘schemes of arrangement’ between a business and its creditors when they want to restructure. However, one of the weaknesses of the existing schemes of arrangement is that a relatively junior secured creditor can block or delay a company rescue, despite the proposals being supported by a majority of senior secured creditors. We expect the government will address this by introducing something called a “cram-down mechanism”. This is where a creditors’ scheme of arrangement may be proposed between a company and one or more classes of creditors and then the majority of creditor classes has the ability to bind one or more dissenting classes to the proposal.
Unfortunately, this anticipated new restructuring plan is likely to involve multiple court applications and hearings. So, it will probably be costly to implement and one that may take a long time from start to finish. As a result of these factors, we don’t expect this new procedure to be suitable for most SMEs and, with the courts also affected by the Covid-19 crisis, we think that this procedure is unlikely to see its debut for some time.
The bottom line for directors is – take control. Don’t leave things to chance and don’t guess whether an action is within the law or not. If their business is in financial trouble then the best advice is to get professional help, and get it sooner rather than later. It can help stop the situation escalating and protect them from the risks of personal liability and disqualification.
For more details contact Greg Palfrey, National Head of Restructuring Recovery Services on email email@example.com