Covid-19 Insolvency Law Update: Emergency Changes and Court Hearings

Louis Doyle QC  provides a review of emergency legislation to aid businesses at home and abroad.

Louis Doyle QC

 

Kings Chambers’ insolvency team remains open for business, fully functioning and able to react to instructions at speed. We are working remotely and utilising platforms including Microsoft Teams, Skype for Business and Zoom for conferencing and court hearings.

The rapidly changing environment worldwide

Under laws to be implemented today, 27 March 2020, the German Government will look to mitigate the impact of the Covid-19 pandemic across both criminal and civil law. This includes insolvency law. For tenants of business premises and land, and whilst maintaining in effect the tenant’s payment obligation in principle, the right of the landlord to terminate a lease or rental agreement will be severely restricted for the period 1 April 2020 to 30 June 2020 (subject to extension by Government if the effects of the pandemic are undiminished) if the due debt founding the exercise of the termination rights is attributable to the effects of the pandemic. The new law also suspends the obligation to file for so-called “Covid-19 insolvency” (a phrase we need to get used to in this jurisdiction) until 30 September 2020 (again extendable). Proof of that criteria, as will inevitably take shape in the revised UK provisions, is very likely to be the subject of litigation (with a whole host of other issues) as the pandemic eventually fades, as it must. Similar measures are being considered or implemented around the globe – the Australian Federal Government put in place similar protections on Tuesday of this week, 24 March 2020 – and will inevitably feature in all of the advanced economies as governments seek to prevent the catastrophic macro effect of widespread market or sector failure.

 

Emergency legislation in the UK

In the UK, similar emergency reforms are likely to appear on the statute book in a few short weeks, if not days. As a direct response to the UK Government’s nationwide lockdown in the face of the pandemic, earlier this week the Department for Business, Energy and Industrial Strategy sought the views of leading insolvency and restructuring figures on a suspension or radical revision of the wrongful trading provisions in s.214 of the Insolvency Act 1986, and specific new measures targeted at protecting hospitality and retail entities which have been forced to cease trading.

Wrongful trading is a particular concern because, in the face of unprecedented economic uncertainty, directors might be forced to the conclusion that, given the test in s.214(4) and the risk of what constitutes insolvency after BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28 and the cases that followed (as to the scope of what might count as material liabilities to be considered), the directors have no option but to cease trading so as to avoid potential personal liability. Without emergency legislation the risk is that businesses simply close down en masse.

Allied closely with wrongful trading liability is that under s.172 (promoting the success of the company) and s.174 (duty of skill and care) of the Companies Act 2006. There is no proposal on foot to amend the provisions of the 2006 Act on directors’ duties in response to the pandemic, but, at a speculative and superficial level, it would appear unlikely that, under any new measures, a director

had acted in accordance with the revised wrongful trading provision, so as to avoid personal liability, but, at the same time, in breach of ss.172 and/or 174.

Perhaps the other most potentially far-reaching measure under discussion is a temporary moratorium for the purpose of preventing businesses being pushed into administration or wound up; that is, a statutory mechanism to protect businesses by disrupting creditor rights to the extent of protecting against the imposition of the rescue mechanism of administration, in or out-of-court at the behest of creditors, as remodelled under the 2003 legislative changes. A radical measure, indeed.

Other emergency pandemic specific developments and recent developments

Court Hearings and the CPR Practice Direction on Video or Audio Hearings in Civil Proceedings during the Coronavirus Pandemic. The latest official update from the Lord Chief Justice was published on 23 March 2020 and appears on the Court’s Tribunals Judiciary website (which includes, amongst the welter of guidance, the protocol for the conduct of remote hearings). The default position is that hearings will remain effective, albeit they will not be conducted in person. The pandemic does not have the effect automatically of taking hearings out, although that might be the effect on consideration of the specific circumstances of any case. As the opening to the guidance published on 23 March 2020 puts it:

“This short statement comes to judges, and others, to provide some clarity for the coming few days. We have put in place arrangements to use telephone, video and other technology to continue as many hearings as possible remotely. We will make best possible use of the equipment currently available; HMCTS is working round the clock to update and add to that. Some hearings, the most obvious being jury trials, cannot be conducted remotely.”

By way of a technical amendment, effective from 24 March 2020, the new Practice Direction 51Y, made under CPR r.51.2, makes provision in relation to audio or video hearings. Whilst effective, where the Court directs the proceedings are to be conducted wholly as video or audio proceedings, and that it is not practicable for the hearing to be broadcast in a Court building, the Court may direct that the hearing must take place in private where it is necessary to do so to secure the proper administration of justice. The Practice Direction will cease to have effect on the date on which the Coronavirus Act 2020 ceases to have effect.

At grassroots level in Manchester and the North

At grassroots level in Manchester, and across the North of England, the Judges and staff of the Business and Property Courts have been busy, under the direction of the Vice-Chancellor, Snowden J. Under guidance promulgated today, with the exception of physical hearings which, for the moment, cannot happen, the position is that the court will do whatever can be made to work for the parties in the conduct of a hearing. The capacity to use BT MeetMe (a national or international dial-in service) has been expanded for hearings suitable to take place by telephone. The court is not wedded to any particular video-conferencing platform in the short-term; Microsoft Teams, Skype for Business and Zoom are all widely available and possible options for any hearing. Co-operation between the parties is key. Subject to approval and direction by a Judge, the courts will expect the parties to agree the best platform for a hearing, consider how a hearing is to be recorded, consider by whom and how that recording is to be distributed and retained, consider how public access to the hearing is to be achieved (or consideration given to requesting a direction that a hearing is in private), and provide an electronic bundle as early as possible, pared down to the documents which are really necessary for the determination of issues.

Adjournment of listed trials

Adjournment of Listed Trials. So fast-moving is the pandemic and its consequences that there may be a temptation to imagine that, at least in the absence of established in-situ technological infrastructure, listed trials of any complexity are bound to be adjourned. This is not, however, the

view expressed by it Teare J, the Judge in charge of the Commercial Court, in refusing an application made on 19 March 2020 to adjourn a two-week trial due to start during the week of 23 March, even in the face of one of the parties indicating that their experience of using technology for such purposes was not good.

“Well, it does appear to me that it would not be right simply to adjourn the trial fixed for next week to some unidentified date in the future. The courts exist to resolve disputes and, as I noted this morning, the guidance given by the Lord Chief Justice is very clear. The default position now, in all jurisdictions, must be that hearings should be conducted with one, more than one, or all participants attending remotely …

I accept nothing is certain. There may be difficulties with the conferencing facilities which cause delay … But essentially the court would be seeking to use the two weeks which were intended to be occupied by this case. I bear in mind Mr S’s experience of video conferencing facilities, and I note that he suggests that going down this route would be an unmitigated disaster. But that appears to me really not to be the sort of approach which the court, in the present climate, can adopt. The court has to be optimistic, rather than pessimistic. It is the duty of all the parties to seek to co-operate to ensure that a remote hearing is possible.”

The Judge’s approach is important because it points in the direction in which we can expect the judiciary to lead. It is an approach predicated on trials being capable of being conducted under the prevailing extraordinary circumstances of social distancing and so on, even trials of substantial length, albeit in ways unthought of previously. This might take a combination of optimism, imagination, patience, open-mindedness and a willingness to try on the part of all involved: the Judge, the parties, their representatives (solicitors and counsel), witnesses and the Court’s staff. Trials will require a viable conferencing platform. Counsel will almost participate remotely, as will their solicitors and clients. Witnesses will do likewise, and from disparate locations (even, conceivably, home). The alternative would appear to be lost trials, costs thrown away, backlogs, and the setting of a precedent in terms of approach for the future should such serious difficulties re-visit. This, it seems, is not the face of justice confronted with the pandemic.

There will be circumstances, however, where a trial simply cannot proceed. For example, on 25 March 2020 the High Court vacated a trial in Conversant Wireless Licensing Sarl v Huawei Technologies Co Ltd [[2020] 3 WLUK 354 because the Court did not accept, as the Claimant had argued in seeking to avoid an adjournment pursued by the Defendant (for a 12 month period), that the trial could be conducted largely on the papers with questions being put to experts on paper and the Judge being capable of raising any questions via Skype by way of hearing that ought to be brief. Despite commending the Claimant’s legal team for the approach suggested, the Court identified that neither the CPR nor the guidance provided by the Lord Chief Justice or the Chancellor permitted a trial to be conducted in such a way.

Important recent developments

In passing, and in conclusion, the following recent developments might also be of interest.

HMRC Preferential Status. A decision has been made to defer the introduction of the preferential status of HMRC until December 2020 (subject to a possible further deferral).

Prescribed Part. Although only applicable to eligible floating charge security created with effect from 6 April 2020, the prescribed parties being increased to £800,000.

Members’ Voluntary Liquidations and the off-Payroll Working Rules (IR 35). On 27 February 2020 the Government announced the postponement (not cancellation) of the reforms to the off-Payroll working rules (IR.35) from April 2020 to 6 April 2021. That decision may prompt shareholders to seek to extricate a company placed into MVL where the decision to move into that procedure was predicated on the IR.35 reform being implemented as originally intended. Any such application will test the question of the court’s jurisdiction (most likely under s.112 of the 1986 Act) to unwind the MVL procedure, and in what circumstance

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