July 14, 2020

Volume X, Number 196

July 13, 2020

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COVID-19 Update: Planned Changes to UK Insolvency Laws to Enable Companies to Continue Trading

Introduction

On Saturday 28 March 2020, the Business Secretary, Alok Sharma, announced that the UK government would be introducing legislation to make changes to existing insolvency laws in response to COVID-19. The new measures seek to enable companies undergoing a rescue or restructuring process to continue trading and help them avoid insolvency, and include a temporary suspension of wrongful trading provisions retrospectively from 1 March 2020 for three months. This in particular will be welcome to directors who may be weighing the potential for personal liability when considering taking on Government or bank funding. Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity, although the exact timing remains uncertain – Parliament is currently in recess until 21 April 2020.

Restructuring Plan / Moratorium

The government previously consulted on changes to the insolvency regime and announced plans in August 2018 to introduce new insolvency restructuring procedures. The legislation announced over the weekend will implement those proposed changes. New tools to be available to companies under the legislation are:

  • a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;

  • protection of their supplies to enable them to continue trading during the moratorium; and;

  • a new restructuring plan, binding creditors to that plan.

Some similar tools have of course been available to companies but only through a formal administration or other process. The legislation now announced should make the process easier to access and implement, and to become more widely available.

Wrongful Trading

The current wrongful trading rules have been of particular concern for directors of fundamentally healthy companies in recent weeks, as the impact of COVID-19 puts a strain on normally viable businesses everywhere, and the duration of the crisis remains uncertain.

Under the current insolvency “wrongful trading” regime, a director of an insolvent company in liquidation or administration can become personally liable if he knew, or ought to have known there was no reasonable prospect of avoiding insolvent liquidation or administration. Directors are therefore understandably concerned about incurring new liabilities for the debt they need to see them through the crisis. For instance, under the COVID-19 related lending programs the UK government has created to ease the financial strain of this period (see our memorandum on this topic).

The suspension of the wrongful trading provisions at least during March, April and May (the legislation will provide for the changes to be extended if necessary) will give directors the time and confidence they need to assess the needs of and future viability of their business in a clear headed manner. As a deterrent to director misconduct, the rules against fraudulent trading (trading with the intent to defraud creditors (or any other fraudulent purpose)) and the director disqualification rules will remain unchanged.

Commentary

This announcement is timely and welcome on a broader scale. The wrongful trading suspension is a helpful step by the government to ease the strain on responsible directors dealing with an unprecedented blow to the business, and may help businesses that would otherwise opt for administration or liquidation to weather the storm. From that perspective, the sooner this legislation can be formally passed into law, the better.

The broader reforms to the Insolvency Framework have been in contemplation for years. While, as the 26 March 2020 publication by The Insolvency Lawyers Association points out, the English law insolvency regime has the first purpose of the rescue of the company, is flexible and has always been used innovatively in restructuring situations, these reforms will move the UK closer to the US style of debtor-in-possession restructuring. Once these framework changes take effect, stressed UK debtors in need of restructuring, particularly international businesses, will have a choice of a newly reformed (though untested) UK procedure or opting into a Chapter 11 case in US bankruptcy courts, which are traditionally welcoming to foreign debtors willing to submit to jurisdiction.

© Copyright 2020 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume X, Number 91

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About this Author

Joanna Valentine Corporate Attorney
Special Counsel

Joanna Valentine is Special Counsel in the Corporate Group at Cadwalader, Wickersham & Taft LLP.  

Her practice involves advising domestic and international clients in a broad range of complex corporate transactions across diverse sectors.  She specialises in mergers and acquisitions, including private equity transactions of all types, acquisitions and divestitures, majority, minority and consortium investments, joint ventures and shareholder arrangements, as well as other corporate finance transactions and corporate governance advice. She practices both English and New York law...

+44-0-20-7170-8640
Richard Nevins Financial Restructuring Attorney Cadwalader London, UK
Partner

Richard Nevins is partner in Cadwalader's London Financial Restructuring Group. Richard focuses on complex European and emerging market financial restructurings, and has advised both debtors and creditors on many significant transactions over the last 15 years. He is well versed in relevant insolvency laws in multiple jurisdictions, having closed restructurings of debtors based in the UK, France, Italy, Germany, Spain, Portugal, Sweden, Poland, Norway, Russia and the Netherlands.  He is very experienced in New York law high yield indentures, and in deal implementation by means of UK scheme of arrangement and U.S. Chapter 11 proceedings.

A graduate of New York University School of Law and an editor of its Law Review, Richard received his undergraduate degree, magna cum laude, from Georgetown University. He is a registered foreign lawyer in England and Wales, and admitted to practice in the State of New York.

Practice Areas

  • Bankruptcy Litigation
  • Distressed Energy
  • Distressed Finance
  • Distressed Investing and Mergers & Acquisitions
  • Financial Restructuring
  • Real Estate Restructuring
  • Special Situations
44 (0) 20 7170 8624
Jeremy Cross, Cadwalader LawFirm, Finance Attorney
Partner

Jeremy Cross is a vastly experienced loan finance lawyer with particular experience in funds finance and real estate finance as well as more general experience in acquisition, leverage and general corporate finance.

Jeremy acts for lenders, borrowers and sponsors on a wide range of domestic and international financing transactions. His clients include the Royal Bank of Scotland, Lloyds Banking Group, Barclays Bank, Wells Fargo and National Australia Bank along with a number of other banks, non bank financial institutions and funds.

44020-7170-8530
Nathan Parker Corporate Finance Attorney Cadwalader London, UK
Partner

Nathan Parker is a partner in the Finance Group in Cadwalader's London office.

Nathan has worked in the City for over a decade on a large range of financing transactions and has represented leading private equity sponsors, funds and their portfolio companies in connection with their financing of cross border leveraged buyouts, restructurings and holdco and other structured indebtedness. 

He frequently works on new money investments and direct lending transactions in the restructuring and special situations context as well as fund financing transactions for both borrowers and...

44 (0) 20 7170 8568
Christopher Smith Corporate Attorney Cadwalader London, UK
Associate

Christopher Smith is an associate in the Corporate Group in Cadwalader’s London office.

Christopher advises clients on a broad range of corporate matters, including mergers and acquisitions, joint ventures and other shareholder arrangements, private equity and corporate governance.

Christopher received his LL.B. from the University of Salford, before completing the Legal Practice Course at BPP University in London. He is admitted to practice in England and Wales.

Practice Areas

44 (0) 20 7170 8736