Insolvency law shake up welcomed

The UK Government announced on Wednesday details of planned changes to the UK Insolvency Laws, including provisions to support businesses facing cash flow difficulties as a consequence of Covid-19.

An announcement which has been welcomed by many insolvency practitioners in the region.

The changes enable companies facing financial distress to apply for an initial 20 business day moratorium, which can be potentially extended by a further 20 business days.

This measure has been designed to give businesses breathing space from the pressures of the pandemic and will be available to companies that are, or are likely to become unable to pay its debts. Importantly that means companies that are not insolvent but which have cash flow difficulties can benefit.

Unexpectedly the new moratorium will be available until at least 30 June 2020 to companies that may already have outstanding winding up petitions presented against them.

What the moratorium means is that although most payments (such as rent and wages and the costs of goods or suppliers supplied during the moratorium) will have to be paid during the potential 40 day period, other unpaid debts falling the company will get a payment holiday.

In addition, the moratorium means that aggressive creditors cannot take steps to commence legal proceedings or repossess goods or initiate insolvency proceedings and landlords cannot forfeit the company’s lease – although there are also currently temporary restrictions that prevent landlords from exercising that right.

In addition 5o 5h3 moratorium new rules have been introduced protecting the supplies of goods and services to the business. Known as ‘ipso facto’ provisions, they prevent a supplier from terminating a contract because the business has obtained a moratorium – regardless of the terms of the supply contract.

Alongside the permanent changes of the morotorium and ipso facto provisions, there have also been some temporary changes to the UK Insolvency Laws introduced. These include a blanket suspension of wrongful trading laws from 1 March 2020 until 30 June 2020, and restrictions on the presentation of winding up petitions or a winding up order being made where the reason for non-payment of a debt is COVID-19 related. According to Squire Patton Boggs “these should provide companies with some relief to enable them to assess the shape of their business”.

Although the proposed changes are not yet in force, the Government has made it clear that it intends to fast track the legislation to make then current Bill law.

Susan Kelly, restructuring and insolvency partner at Squire Patton Boggs in Manchester, commented: “Once the changes to the legislation have been through parliament these will be useful additional tools to help professionals assist businesses, particularly those suffering from cash-flow problems and distress as a consequence of lock-down in the UK. As with any new process there will likely be some teething problems, but the changes are welcome.”