Insolvency reforms: What do they mean for your business?

In the wake of the Coronavirus crisis, the Government has given more options to business owners on the brink of insolvency. Let’s find out more.

The Coronavirus crisis is threatening thousands of businesses across the UK with insolvency. Companies have been forced to shut their doors, or have seen their demand decimated. Many will be wondering how long they can carry on.

The Government wants to give as many businesses as possible a chance to emerge from the pandemic intact, then bounce back. It has introduced a variety of stimulus packages and altered laws around commercial property and employment. It has also announced changes to rules around insolvency, effective now. Additionally, it has fast-tracked other changes initially proposed in 2018. On June 25th, the Corporate Insolvency and Governance Act 2020 received Royal Assent.

In this article, we will look at five changes this Act brings, as well as how they can help your business if you are feeling threatened by insolvency.

Termination clauses in supplier contracts

When suppliers cut off their services to struggling business, it can often make a bad situation even worse. How can a business pull its way out of trouble if it cannot access essential supplies? The new Act attempts to compel suppliers to carry on fulfilling their previously agreed contracts, even if  a company starts the insolvency process, or restructures.

Moving forward, clauses in supplier contracts that allow suppliers to terminate or change the terms if the buyer enters insolvency or a formal restructuring process will be rendered ineffective. Neither will suppliers be allowed to terminate contracts based on previous breaches, once a company begins the insolvency or restructuring process.

Wrongful trading

Wrongful trading is when a director carries on trading through their company, knowing that they have no reasonable prospect of avoiding liquidation. The law says that directors can be personally liable for their company’s debts unless they have taken every possible step to minimise losses to creditors.

The COVID-19 crisis has made it difficult for directors who want to avoid wrongful trading. As a result, some directors may have wound up their companies earlier than strictly necessary.

The Government has temporarily suspended personal liability for wrongful trading for directors of companies (subject to some exceptions) until September 30th 2020.

For business owners, it removes some of the fear and uncertainty at this challenging time. It will stop them from filing for insolvency when their business may still be viable.

Interim moratorium

The Act introduces a 20-day moratorium for businesses struggling with liquidity because of the Coronavirus. These 20 days are designed to give owners ‘breathing space’ to restructure their company or look for a rescue package, while precluding creditors from calling in debts. It also maintains companies’ access to their supplies and allows them to borrow money in order to carry on trading.

For business owners on the brink of insolvency, this 20-day period is the last chance to succeed, to reorganise their business in a way that will help them bounce back in a post-COVID world. However, if the moratorium is going to work, they will have to rely on the good faith of external forces, including banks and creditors. Banks may not wish to lend to struggling businesses, with or without a moratorium.

Restructuring

This part of the Act allows struggling businesses to create a ‘flexible restructuring plan’ which binds all creditors, including ones that vote against it. Businesses will be able to restructure without the consent of every creditor class, provided the plan does not leave them worse off compared to the next likely alternative if the plan was voted down.

Restructuring can help businesses in financial difficulty reduce negative effects and eventually bounce back. The purpose of the Act here is to give the business one last opportunity at success, combined with a moratorium.

Winding up petitions

A final helping hand for businesses that are struggling during the Coronavirus crisis is a change to how winding up petitions can be issued.

Until September 302020, a company’s creditors can no longer present a winding up petition based on its inability to pay debts during the Coronavirus period, unless it has grounds to believe the pandemic has not had a financial effect on the company’s performance. Also, until the end of September, creditors can no longer use statutory demands as grounds for presenting winding up petitions.

These measures are backdated to 27th April 2020.

Help for businesses

Altering insolvency laws in this way comes at the best possible time for companies that are struggling through the Coronavirus crisis. It could mean the difference between viability and insolvency for thousands of businesses.

If you need help around any aspect of business law at this challenging time, it’s time to talk to Couchman Hanson.

At Couchman Hanson, our solicitors genuinely care about getting the best outcome for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits with our values of integrity, honesty and authenticity.

Call 01428 722189 or email us at enquiries@couchmanhanson.co.uk