Insolvency bill to enact business rescue period
The government tabled a Corporate Governance and Insolvency Bill in Parliament on Thursday (20 May) to enact new measures to support businesses in distress.
Hailed by Colin Haig, president of the insolvency trade body R3, as “the biggest change to the UK’s insolvency and restructuring framework for almost 20 years”, the act puts forward a number of radical measures to ease the burden and stigma of corporate insolvency.
With more than half a million UK businesses teetering on the brink of collapse, the government said the overarching objective of the bill is “to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time.”
Key measures include:
- A new moratorium period to give companies breathing space to explore rescue options.
- Removing the threat of winding-up petitions against companies with unpaid debts as a result of the pandemic and temporary relaxation of wrongful trading rules so directors can continue trading through the emergency without the threat of legal action.
- Easing company filing deadlines for accounts and rules around annual general meetings (AGMs).
A government announcement today summarised the main points of the legislation as follows.
Based on the US model, the moratirum is designed to give businesses a 20-day breathing space to explore rescue and restructuring options. During that time the company will remain under the control of its directors, but the process must be overseen by licensed insolvency practitioner. The moratorium can be extended to 40 business days, with further extensions at the agreement of creditors or the court.
The bill will also allow restructuring proposals to be put in place even if a group of creditors dissents from the plan, so long as it is sanctioned by a court as fair and equitable, and those creditors would be no worse off than if the company entered an alternative insolvency procedure.
Winding up orders
To prevent companies adversely affected by the virus from being wound up, the insolvency bill stop statutory lodged between 1 March 2020 and 30 June 2020 from being used as the basis of winding-up petitions at any point on or after 27 April 2020.
During March wrongful trading rules were relaxed. With so many companies in jeopardy and turning to banks for coronavirus loans, the government iwanted to remove potential personal wrongful trading liabilities from company directors who were doing their best to keep their businesses going.
The bill will enshrine this policy in law for firms trading between 1 March and 30 June. Under the new rules, courts will not take into account losses incurred during this period when considering a director’s liabilities for wrongfully trading. Begbies Traynor partner Julie Palmer told AccountingWEB earlier in the month the concession is welcome, though wrongful trading cases are rare and tend to involve larger organisations.
Again, the insolvency bill has been drafted to enact deferrals and deadline extensions already agreed with Companies House and the Financial Reporting Council. Organisations can apply for default three-month delays for accounts, confirmation statements and changes of details without incurring penalties. The rules apply to event-driven filings that are required in advance of the confirmation statement.
Annual general meetings
Going back to 26 March, companies that held AGMs that adhered to social distancing measures, but did not fulfil their constitutions will be ruled to have complied with the law. Companies forced to postpone AGMs after 26 March will be allowed to hold them up to the end of September.
Some commentators noted how the legislation was being rushed thorugh Parliament, but in the government’s view, the accelerated introduction of the rescue reform package will give companies the best chance of surviving during the COVID-19 pandemic and beyond.
For R3’s Colin Haig, “This legislation comes not a minute too soon.”
The new tools will give insolvency and restructuring professionals more options to rescue businesses and the trade body was pleased the government took on some of its feedback on the draft proposals, he said.
“Previously the moratorium would only have been open to solvent businesses, but now the legislation will enable insolvent businesses to obtain a breathing space to review their options, free from the risk that a creditor may push the company into an insolvency procedure prematurely,” said Haig.
“This greatly increases the number of struggling but potentially viable businesses who could benefit from a vital breathing space, and will help to repair the economic devastation caused by the pandemic.”
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