COVID-19: Insolvency Law Changes Passed By Stephen Layburn*
The package of measures account the likelihood of trading conditions announced by the improving, the likelihood of the company Government on 3 April reaching a compromise or other has now been passed: arrangement with its creditors, or any COVID-19 Response other relevant matters. (Further Management Measures) Legislation It is important to note that, despite this temporary relief, directors continue to be subject to the Act 2020. balance of their duties under the Companies Act There were a small (including the ‘primary duty’ - to act in good faith number of changes and in best interests of company). As a result, made during the pathway care needs to be taken to ensure that decisionthrough Parliament – for measures that are making is soundly based and adequately intended to be temporary and provide much documented – and independent / professional needed support for businesses (and their advice is obtained where required. directors) that need some breathing room in order to be able to form a realistic view of whether they As a result of submissions during the legislative will survive the rigours that have, or will, flow from process a ‘purposes’ clause was added: the COVID-19 outbreak. However, it is not a purpose of this schedule [the Most of these temporary measures have safe harbour] to facilitate the ability of a company immediate effect - noting that the safe harbours that has no realistic prospect of continuing to (for directors) from insolvent trading are trade or operate in the medium or long term to retrospective. defer a decision to enter into liquidation to the detriment of its creditors. Directors’ duties – safe harbour The safe harbour for directors from the insolvent This serves to underline the point that the trading regime in the Companies Act take effect temporary safe harbour is aimed at providing from the date of announcement (3 April) and directors with the necessary confidence to work provide some relief for a period of 6 months. on saving / trading out of difficulties a business
that is otherwise viable and has suffered a During that period, a director’s actions will not temporary setback as a result of COVID-19. breach the duties in sections 135 and 136 of the Companies Act (reckless trading / incurring Business Debt Hibernation (BDH) obligations) if: The BDH regime provides companies (and a • the company was able to pay its debts as they range of other trading entities – but not sole traders) with some much-needed breathing room fell due on 31 December 20191; to work with their creditors – to come up with a longer term ‘work-out plan’. • in the good faith opinion of the director: o the company has, or in the next 6 months2 is likely to have, significant liquidity problems, which are a result of COVID-19; and o it is more likely than not that the company will be able to pay its due debts in 18 months’ time (30 September 2021). In order to assess this, the directors may take into 1 2
There are two steps to the hibernation under the BDH regime: • entry: which triggers an automatic one-month moratorium; and • approval (by creditors): which triggers an extension of up to 6 months,
This relief also applies to new companies formed between 1 January 2020 and 3 April 2020. This timeframe is capable of being extended – at this stage the trading environment in September for some sectors appears to be a step into the unknown.
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