The current relaxations of, and modifications to, corporate insolvency legislation will last until 30 April 2021. But by regulations laid in Parliament on 11 February 2021, the Government is asking for power for another year (to April 2022) to make temporary amendments or modify the impact of corporate insolvency legislation.
This power “will provide a means for specific and temporary changes to be made to corporate insolvency and governance legislation should the urgent need arise to do so, which will allow quick reactions to any unforeseen challenges arising as a result of the pandemic’s impact on business.” It is yet to be seen what (if any) changes the Government might seek to make, whether ahead of that deadline or after it has expired, but it might be expected that those relaxations and modifications will be extended.
But directors should not rely on that as any sort of safety net. Directors who know or should know that their company is insolvent or that it is probable that their company will become insolvent owe a duty to creditors to put their interests first.
At the moment, companies can take advantage of the furlough scheme, loans and grants and business rates relief, as well as the restriction on the grounds for winding up and the suspension of the wrongful trading provisions. Those will come to an end. And if directors believe that their company might be in trouble once that support is taken away but that there might be a genuine prospect of survival, they need to act sooner rather than later in any attempt to restructure and avoid formal insolvency.
Things directors might consider doing include:
- Reviewing payment terms, both for incoming and outgoing payments. Are payments out being made too early? Will any creditors agree to accept longer payment terms? Care should be taken not to exceed payment terms and risk creditor action such as seeking a county court judgement or (subject to the present restrictions) presenting a winding-up petition. Are the company’s own debtors paying late? Cashflow will be improved if the company’s own customers pay on time.
- Looking to restructure borrowing. Will lenders relax covenants? Are there other lenders who might offer better terms? But consider the risk of the company being unable to repay existing and additional borrowing. The directors might be at risk of personal liability if more and more is borrowed when there was really no prospect of avoiding insolvency.
- Seeking stakeholder investment. Will shareholders provide more support? What about partnerships with trading counter-parties? There is likely to be pressure at other parts of the company’s supply chain – and therefore the opportunity to reach mutually beneficial arrangements.
- Entering into time to pay agreements with HMRC. But this might imply commercial insolvency from and inability to pay Crown debts when due.
- Exploring support options available from the Government, while they remain available.
At the same time, there are more formal, director-led arrangements which have the potential to provide much assistance:
- The moratorium introduced by the Corporate Insolvency and Governance Act 2020 (CIGA). This is supervised by a “monitor” who must at all times consider that it is possible to rescue the company. It leaves the directors in control and gives the company an initial 20 days’ breathing space; the period can be extended. But, it has to be accepted that the company is or probably will become insolvent.
- A restructuring plan under Part 26A of the Companies Act 2006, given effect by CIGA but proposed by the Government in 2018. The company must be in financial difficulty and the plan must aim at resolving that difficulty. The court might sanction the plan despite the dissent of a class of creditor (the “cross-class cram down”) if certain conditions are met. If there has been an earlier moratorium, some creditors might in effect have a veto.
- A company voluntary arrangement (CVA). This a way of reaching a compromise with creditors and can potentially achieve a similar result to a restructuring plan. They are sometimes seen as controversial and the company has to comply with the CVA for some time.
Trying to rescue a company in financial distress is a turbulent experience. Directors should seek and act on professional advice at the earliest moment and throughout, giving their advisers full and frank instructions and recording the advice given and action taken. There might come a point when that advice is to place the company into a formal insolvency process (most likely administration or liquidation). At that point, the directors owe it to creditors and to themselves to do that without delay.
Article written by
David Mohyuddin QC, barrister at Radcliffe Chambers