Matthew Howse: The Corporate Insolvency and Governance Bill and NI businesses
Eversheds Sutherland partner Matthew Howse explores what the Corporate Insolvency and Governance Bill means for businesses in Northern Ireland.
There are decades when nothing happens and weeks when decades happen. This certainly seems the case in terms of Insolvency reforms. The UK Government’s long-awaited Corporate Insolvency and Governance Bill had its first reading in Parliament last month and will return tomorrow. Meanwhile, the Minister for the Economy, Diane Dodds will bring a motion to the Assembly today, to approve the amendments to assist companies in financial difficulties.
The Bill is an interesting mixture of temporary measures announced specifically to combat the economic effects of the COVID-19 pandemic, but also more permanent measures included in the Government’s previous consultation from 2016. It includes a new statutory moratorium process, a new restructuring plan procedure, as well as temporary measures regarding wrongful trading and the presentation of winding up petitions.
These measures are timely and may unfortunately become vital for many businesses in the coming months. Despite the unprecedented level of government support offered to businesses, not all will survive. Those that were struggling before COVID-19 are likely to be at higher risk.
By focusing on several provisions, the government is obviously seeking to provide a temporary shield to companies who are unable to pay their debts. The proposed moratorium, one of the permanent measures, seeks to give struggling businesses a 20-business day opportunity to consider a rescue plan, which will be extendable for a further 20 business days or, with creditor consent, up to one year.
Practically speaking, this will prevent enforcement of security, and the commencement of insolvency proceedings against the company, including forfeiture of a lease. For companies in distress, this would appear to be a helpful mechanism. However, it should be noted that ongoing liabilities during the moratorium period will have to be met and as such, it is probably only going to be appropriate for companies with sufficient cash or access to other funding.
Also included is a new restructuring plan, again a permanent measure, which will allow struggling companies or their creditors to propose a plan, the aim of which is to provide an alternative rescue. This plan will enable complex debt arrangements to be restructured and will support the injection of rescue funding. It is worth noting that the restructuring plan is likely to be quite complex and expensive. Therefore, it is unlikely to be a practical solution for small SMEs who are in distress. This new procedure is not dissimilar to the existing “scheme of arrangement” which is a statutory legal process allowing a company to restructure its debt - the distinct difference with this new plan is that it can be sanctioned by the court, at discretion even if not all classes of creditors vote for it, subject to certain criteria.
Furthermore, the government hope to introduce temporary provisions to effectively void statutory demands served on a company between 1 March 2020 and 30 June 2020 and restrict Winding-Up Petitions to 30 June 2020. The idea behind these temporary measures is to prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19.
Additionally, the Bill provides a temporary suspension of the wrongful trading regime to remove the threat of personal liability for directors (in relation to wrongful trading only). The suspension is to apply until 30 June 2020, but in the event that the impact of the pandemic on businesses continues beyond the end of June, the suspension to the wrongful trading regime could be extended for up to a further six months. Although, directors may not be liable to contribute to losses in this period, losses incurred in the periods before and after COVID-19 remain a factor.
These proposed changes are wide-ranging in scope. It will only be over time that we will fully see and understand the impact that these will have on businesses throughout Northern Ireland. Ultimately, the fewer businesses that are forced to rely on the provisions included within this Bill, the better.