COVID-19 – Corporate Insolvency Framework ‘Protective Shield’ Changes / Expected Insolvency Practice Direction

Eleanor Temple, Barrister at Kings Chambers and Chair of R3 (Yorkshire) responds to today’s (28 March) announcement of emergency changes to the corporate insolvency framework. (We will put full details of the legislative changes on this site, together with links as soon as they are available.)

Eleanor Temple

 

Overview:

The UK has a world-leading insolvency and restructuring framework, and the new restructuring tools outlined by the Government are aimed to give businesses and the insolvency profession the tools to help businesses navigate inevitable COVID-19 disruption.

The Government and the Senior Judiciary has listened to the insolvency profession’s feedback and is focused on making these tools accessible for the businesses that need them in light of the current pandemic. To this end a new Insolvency Practice Direction will be released imminently.

The Government will address many of the concerns that the insolvency profession has expressed about the corporate insolvency reforms since they were first announced in 2016.

The planned moratorium, for example, will not be useful if it can’t be accessed by insolvent companies.

It is important that, as the Government works on the details, it listens to creditors – including lenders, the wider business community, and landlords – on how they will be affected by the moratorium.

Wrongful Trading:

The insolvency profession does however have some serious concerns about the Government’s plans to suspend wrongful trading under Section 214 of the Insolvency Act 1986, for fear that a blanket suspension could be abused. The profession favours a revision of those provisions with specific measures aimed at protecting retail, hospitality and rental property companies, who have been forced to close by the Coronavirus Act 2020. It is anticipated that this will result in some form of statutory relaxation/protection for those continuing to trade following closure. The provisions of Section 214 of the Insolvency Act 1986 are there for a reason, they protect creditors when directors of a business knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Directors will of course be worried about the consequences of continuing to trade amid the COVID-19 disruption if they’re missing debt payments and cannot trade effectively, or at all, but good advice from an insolvency practitioner or insolvency lawyer should remove their risk of facing a wrongful trading action and such advice should be sought at an early stage.

Whilst Germany has suspended the legal obligation to file for insolvency with retroactive effect as of 1 March 2020 for the period up to 30 September 2020, based upon a presumption that the ‘Insolvency Maturity’ has been brought about by the effects of Covid19, and that there is a viable prospect of recovery from illiquidity if the company was not illiquid on 31 December 2019, as with any presumption, if there is evidence to the contrary it can be rebutted.

The stated aim of the German legislation is “to ensure that the current uncertainties and difficulties regarding the proof of causality and the predictability of further developments are in no way at the expense of the applicant”. The presumption should only be considered rebutted if “there can be no doubt that the COVID-19 pandemic was not the cause of the Insolvency Maturity and that the elimination of an occurred Insolvency Maturity could not be successful”.

The important point to note is that it is not the potential applicant but the person claiming the existence of an obligation to apply for insolvency proceedings who must demonstrate and prove that insolvency has not been caused by the COVID-19 pandemic or that there is no prospect of successful recovery from illiquidity.

Winding-up Petitions:

In England and Wales, for now there is a de-facto moratorium for winding-up petitions on foot with the possibility of putting forward special grounds for pursuing a petition at this time. This issue will be dealt with by the imminent revised Insolvency Practice Direction.

In Germany, for an insolvency petition presented by a creditor to be successful, the insolvency of the debtor must have occurred before 1 March 2020.

In Spain, creditor’s petitions for compulsory liquidations will not be allowed until 2 months after the state of emergency has ended.

Insolvency filings:

In England and Wales, the court has said that while it will continue to aim to process all e-filing and hard copy work within normal turnaround times, these will inevitably come under pressure as more staff are required to self-isolate. There is a core level of staff present at the Rolls Building and in the regional Business and Property Courts to process hard copy filings. If there is a particularly urgent filing then it is best to contact the relevant team dealing with the filing (by email / telephone) who will prioritise this taking account of other urgent work.

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