Much of the focus on Alok Sharma's, the UK business secretary's, press conference on Saturday 28 March has been on the headline grabbing temporary suspension of wrongful trading legislation for a 3 month period back dated to 1 March. This proposal has been the subject of much discussion and the partial removal of the threat of personal liability for directors facing a set of business challenges that would have been almost inconceivable pre-Covid 19 has been broadly welcomed. Whether this proposal was legally necessary is questionable as a directors' conduct is viewed on both an objective and subjective basis; what would a reasonable director do in the circumstances facing the specific director, with the skill, knowledge and experience of that specific director? It is difficult to imagine circumstances where, if the company were eventually to fall into an insolvency process, the court would impose personal liability on a director who during the current huge economic uncertainty was acting reasonably having regard to his employees, his customers and creditors by continuing to trade in an attempt to avoid an insolvent demise for the company.
Of equal, if not more importance, was Alok Sharma's reference to new measures which would help UK companies 'which need to undergo a financial rescue or restructuring process to keep trading.' With fewer accompanying signals of what may be intended, a little reading between the lines, is required.
In 2016 the Government undertook a review of the corporate insolvency framework. The review and subsequent consultation in 2018 were driven by a European Union wide reflection on insolvency proceedings and an EU Directive, which would compel Member States to introduce business rescue procedures akin to the US Chapter 11 process.
The Government's review and proposals are instructive and worthy of review as it here we may see what we may see a blue print for the emergency measures that will be introduced to deal with the crisis and may be utilised during the recovery period that will follow.
In short the proposals were:
- The introduction of a new moratorium procedure, allowing a company breathing space when creditors (including secured creditors) cannot take action; and time to plan a restructuring of the business or new investment. An insolvency practitioner would be required to monitor the company during the moratorium, which would be commenced by the filing at Court and Companies House of forms confirming the company's eligibility.
- The prohibition of enforcement by suppliers of termination clauses and/or an ability to change terms and conditions by reason of an insolvency event.
- A new restructuring plan with an ability to bind different classes of stakeholder, such as shareholders, secured creditors and unsecured creditors.
The Government's response to the consultation saw a significant watering down of some of the proposals, with importantly the moratorium period being reduced from 3 months to 28 days. Crucially the process was on reflection only to be made available to those companies that faced prospective insolvency and were not at that point insolvent. The point also being made was that the process should not be abused by companies with minor or short term cash flow issues. The monitor would be responsible for ensuring that a rescue of the company is more likely than not and that the company had sufficient funds to enable it to carry on.
With the prospect that many companies will be unable to pay debts as the fall due and will therefore be technically insolvent it is difficult to see how these watered down proposals would be of use in the post Covid-19 world. A supervised moratorium for a 3 month period available for all companies facing insolvency or insolvent at the time would be a minimum requirement.
It should also be noted that this new moratorium would be in addition to the interim moratorium obtained when a company files a notice of intention to appoint an administrator. The interim moratorium is however of less value due to case law which restricts the filing of a notice to circumstances where there is a qualifying floating charge holder and a settled intention to appoint an administrator. Perhaps reform of this procedure is also required.
As a counterweight to the proposal to restrict suppliers from exercising termination clauses on an event of insolvency, it was proposed that those who supplied the company during a moratorium would be afforded 'super-priority' and paid before other creditors. It was noted that the Government did not want to legislate on who may or may not be an essential supplier and extend the application of the Insolvency (Protection of Essential Supplies) Order 2015 (which currently prevents utility and IT and telecom suppliers from withdrawing supplies to a company in administration). Again a more radical approach to prevent financial Darwinism may well now be required.
Lastly a new process operating like a company act Scheme of Arrangement was proposed, which would see classes of stakeholder required to separately approve a reconstruction plan by a 75% majority. Those classes of creditor who had prior claims in order of statutory priority (e.g. secured creditors) if they dissented, would be required to be paid in full, in order for junior classes to be paid in accordance with the scheme, unless the court otherwise approved. This cross class cram down would be new to the UK and a highly useful move.
There is at the current time no timetable as to when these emergency measures will be introduced, but with the blue print already prepared and with greater imagination it would be hoped that UK insolvency professionals are to be afforded some new tools to face the hard work ahead.