“There will be challenging times ahead… we will not be able to protect every single job or save every single business, but… we [will] get through this, get through it together, and emerge on the other side both stronger and more united.”
The Chancellor of the Exchequer’s statement on 24 March 2020 encapsulates the Government’s renewed focus on saving companies from insolvency during this pandemic. As the lockdown rumbles on, this week’s bulletin focuses on the current and upcoming reforms in insolvency.
- Isabel Petrie sets out the key procedural developments in the new Temporary Insolvency Practice Direction;
- Lara Kuehl explores the temporary suspension of wrongful trading provisions during the Coronavirus pandemic; and
- Oberon Kwok discusses the fast-tracked reforms to the insolvency legislation, including a new moratorium, the maintenance of essential supplies and a new cross-class cram down restructuring procedure.
Should you wish to discuss any of these topics, or raise any other queries, do not hesitate to contact either the clerking team (+44 (0)20 7420 9500 or firstname.lastname@example.org) or any member of Chambers. Please rest assured that Selborne Chambers remains fully operational and very much open for business.
Mark Warwick QC
Temporary Practice Direction Supporting the Insolvency Practice Direction (“TIPD”)
The TIPD was introduced on 6 April 2020. It supplements the existing Practice Direction on Insolvency Proceedings published in July 2018 and will remain in force until 1 October 2020 unless amended or revoked. A copy can be found here.
The TIPD should be read together with the available Guidance Notes for different regions:
- “The London Guidance Note” from Chief ICC Judge Briggs dated 7 April 2020 can be found here.
- For the North & North Eastern Circuits (“NNE Circuits”), “The NNE Circuits Guidance Note” from Snowden J dated 6 April 2020 can be found here.
The aim of the TIPD is to assist court users litigating insolvency matters in the Business & Property Courts (subject to any variation outside London as directed by the relevant supervising judge). It deals with a range of procedural matters, with a focus on enabling hearings and other procedural steps to be carried out remotely.
Following an introduction, definitions and notes on the application of the TIPD, paragraphs 3 to 9 contain the substantive guidance on the following matters:
As set out in Para 6, from now on ALL insolvency hearings will be conducted remotely via Skype for Business (or such other technology as the parties and the Court may agree to in advance of the hearing).
If, during the course of a remote hearing, the Judge determines that the hearing should not continue (for any reason), the hearing will be adjourned and new date and time shall be fixed by the Court. The Court will issue a notice of adjournment if this happens.
Adjournments & Listing
Paragraphs 4, 5, 7 & 8 (when read together with the associated Guidance Notes) relate to adjournments and listing of insolvency work. The key features are as follows:
Generally: matters adjourned to be re-listed
- Save for winding-up and bankruptcy petitions listed before ICC Judges in the Rolls Building or on the NNE Circuits, all petitions, applications and claim forms listed for hearing prior to 21 April 2020 are adjourned to be relisted in accordance with the TIPD (Para 4.1);
- The re-listing of hearings will be dealt with by the Court (Para 8). The Court will initially propose the method for the re-listed hearing. Any disagreement by the parties as to the method of the hearing can be dealt with by way of written submissions or, where necessary, a short remote CMC (Para 8.2 & 8.3).
Exception: winding-up and bankruptcy petitions
- In relation to winding-up and bankruptcy petitions in the Rolls Building and the NNE Circuits (and other Courts once they adopt the procedure set out in Para 7), the court will allocate time slots for 2 or more petitions and provide a video or telephone conferencing link (Skype for Business or other method). The links will be published on the daily court lists (Para 7.2).
- Anyone intending to appear on a winding-up petition must serve the usual notice pursuant to Rule 7.14, complete with telephone number and email so that the Court can invite them to join the hearing (Para 7.4).
Exception: urgent matters
- Any party objecting to the automatic adjournment of a case on the ground that their matter is urgent may apply to have it re-listed on an urgent basis (Para 4.2) using the listing procedure set out in Para 5;
- The Urgent Listing procedure under Para 5 requires an email request setting out, among other things, why the matter is urgent, the nature of the application and confirmation that it can be conducted by Skype for Business, other media or telephone;
- The London and NNE Circuits Guidance Notes set out the applications deemed / presumed to be urgent. These lists are not uniform and should be referred to as necessary.
- Surprisingly, applications for relief from the effect of section 127 (Validation Orders) or 284 of the Act only appear in the NNE Circuits Guidance Note. It is likely the Rolls Building ICC Judges will take minimal persuading that these matters are indeed urgent.
- It is open to the parties to argue that any matter is appropriate for an urgent listing if the facts support such a request. The author of this bulletin suggests that applications to appoint provisional liquidators or injunctions to restrain presentation of a petition might also regularly require an urgent listing though not appearing on the Guidance Notes.
Matters affecting the Administration Procedure under Schedule B1
The following notices shall be treated as having been delivered to the Court at the time recorded in the automatic Filing Submission Email, subject to provisions as to timing, court opening hours and the commencement of time frames, set out in Para 3.3 to 3.6
- Notice of Intention to Appoint an Administrator filed by a company or its directors under Paragraph 27 of Schedule B1;
- Notice of Appointment of an Administrator filed by a qualifying floating charge holder under paragraph 18 of Schedule B1; and
- Notice of Appointment of an Administrator by a company or its directors under Paragraph 29 of Schedule B1.
Statutory Declarations by video-conference
Paragraph 9 sets out a video conferencing procedure for the making of a Statutory Declaration required under Schedule B1. The TIPD does not change the law in substance: a Statutory Declaration made otherwise than in-person before someone authorised to administer the oath may still constitute a formal defect or irregularity. However, according to Para 9.2, so long as the video conferencing procedure is followed, the failure to make the Statutory Declaration in person shall not by itself be regarded as causing substantial injustice.
Finally, just a reminder that in Central London County Court, insolvency matters will be dealt with in accordance with the attached Protocol published on 24 March 2020.
TEMPORARY SUSPENSION OF WRONGFUL TRADING PROVISIONS
On 28 March 2020, the Government announced that it would temporarily suspend the “wrongful trading” provisions for company directors. The Government’s stated intention was to give directors confidence to continue to trade during the pandemic without the threat of personal liability if the company ultimately becomes insolvent.
What are the wrongful trading provisions?
The wrongful trading provisions (section 214 and section 246ZB of the Insolvency Act 1986) apply to anyone who is or has been a director (including a shadow, de facto, non-executive and nominee director) of a company.
Under the wrongful trading provisions, when a company goes into insolvent liquidation or insolvent administration, a director may be required personally to contribute towards the company’s debts if the director:
- Knew (or ought to have concluded) that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration; and
- Failed to take every step with a view to minimising the potential loss to creditors that the director ought to have taken.
In practice, even under normal circumstances, it is fairly difficult to establish a wrongful trading claim – the Courts have generally been reluctant to question the business decisions of essentially honest directors operating under difficult circumstances.
In the present circumstances, given the exceptional challenges currently faced by companies and directors as a result of the COVID-19 pandemic, it is unlikely that many wrongful trading claims relating to this period would have been successful in any event.
Nevertheless, the Government may have been concerned that, unless the wrongful trading provisions were suspended, a number of viable companies would have been placed pre-emptively into liquidation or administration in order to avoid the risk of personal liability for the directors, when such companies might otherwise have been able to trade out of the financial difficulties caused by the pandemic.
What is the effect of the suspension?
At present, the draft legislation implementing the suspension is being prepared so the precise details of the suspension are not yet known. The suspension will have retrospective effect from 1 March 2020 for three months.
The proposed suspension of the wrongful trading provisions has been broadly welcomed by stakeholders, many of whom have said that it will provide greater room for manoeuvre to directors during this crisis period.
However, directors should not assume that continuing to trade at this time is risk-free. In particular, it should be noted that other statutory provisions and duties of directors have not been suspended; e.g., rules against fraudulent trading, transactions defrauding creditors and misfeasance. Company directors are also still under their general duty to act in the way they consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole (or, where there is a risk of insolvency, to act in the interests of the company’s creditors). The law on antecedent transactions (i.e., transactions at an undervalue and preferences) also remains unchanged.
Accordingly, despite the suspension of the wrongful trading provisions, directors trading during this period must still continually consider the risk of insolvency and assess whether any actions are in the interests of shareholders/creditors (as appropriate). If there is any uncertainty about the continued viability of a company, directors should seek appropriate professional advice about their duties and carefully document the reasons for any decisions, particularly any decisions to incur further credit (including Government funding).
FAST-TRACKED REFORMS TO INSOLVENCY
The Government has announced its intention to fast-track major reforms to insolvency law. They were first published in 2016 and last consulted upon in 2018. There is now a renewed urgency to these reforms. We outline the proposed reforms as they now stand.
The new moratorium
A new ‘gateway’ moratorium for companies to consider and implement rescue options is to be introduced.
- The moratorium would last an initial 28 days, subject to extension by the company for 28 more days. Any further extension (possibly up to a 3-month maximum) would require the consent of creditors or a court order.
- The directors remain in control of the company, but must give necessary information to the monitor (see below).
- It would be triggered simply by filing at court. We anticipate e-filing will be permitted. Court permission would be needed if a winding up petition is pending.
- Eligibility requirements are as follows:
- A company which faced a winding up petition (not resulting in a winding up) in the previous 12 months would still be eligible.
- A company which had entered into a moratorium, administration or CVA in the previous 12 months is not eligible.
- That the company will become insolvent if rescue action is not taken. A company which is insolvent already is not eligible.
- There are qualifying conditions to be satisfied both before, and after, entry into the moratorium:
- That a rescue of the company is more likely than not at the outset.
- The company has enough funds to trade and to meet current and new liabilities over the moratorium.
- An IP would confirm the company is eligible and be the monitor for the company’s compliance with the conditions. They could terminate the moratorium for non-compliance.
- A transaction outside the ordinary course of business requires their consent.
- They cannot be the liquidator or administrator in the following 12 months, but can be its CVA supervisor.
- Creditors can apply to challenge the moratorium, on grounds of unfair prejudice or that the eligibility or qualifying conditions are not met.
- The CVA moratorium is to be repealed.
Essential supplies for a struggling company
Termination clauses permitting a company’s supplier to terminate a contract, on the ground of the company’s insolvency, financial position or moratorium, would not be enforceable.
- Any right to terminate on other grounds remains unaffected.
- The supplier must seek the court’s permission to terminate supply, on the ground of undue financial hardship.
- Factors would include the supplier being more likely than not to enter insolvency as a consequence of continued supply, the effect of withdrawal on the company and the prospects of the company’s rescue.
We would observe that, in the current pandemic where both suppliers and users have been universally severely impacted, the court may need to interpret the requirement of undue financial hardship with some flexibility. Simply to ‘shift the pain’ between financially troubled entities may not be helpful.
Cross-class cram down
A new restructuring procedure would be introduced involving the ability to cram down a rescue plan across dissenting classes of creditors, resembling schemes of arrangement.
- A proposal, defining classes of creditors and shareholders, is filed at court.
- Creditors and members may challenge class formations at the hearing.
- If satisfied with the classes, the court will summon votes before a further hearing to decide whether to sanction the restructuring.
- The voting threshold for each class is 75% in value of the debt, as long as more than 50% in value of unconnected creditors vote in favour.
- At least one class of creditors not receiving full payment must vote in favour before the court can sanction the plan.
- Any dissenting class must be paid in full before a more junior class can be paid, but the court can override this requirement if necessary for the aims of the restructuring and it is just and equitable in the circumstances.
For a single procedure to directly force entire dissenting classes to accept a rescue plan would be a significant development for English insolvency law. At the moment where debtors and creditors across the economy are all experiencing financial downturns, the court may have an unenviable task of choosing between the interests of similarly beleaguered parties.
A draft Consent Protocol, permitting the directors of a company in administration to continue to exercise certain managerial powers, has been formulated by R3, the ILA and Mark Phillips QC, William Willson and Stephen Robins of South Square.
It is intended to reduce the current practical difficulties that IPs face in their capacity to manage businesses, by leaving debtors in possession subject to certain controls. The Protocol:
- Delegates managerial powers in relation to the business (within constraints such as transaction limits) whilst reserving the administrator’s powers to the administrator.
- Allows directors to trade and to incur and discharge liabilities, subject to proper record-keeping and reporting to the administrator.
- Is intended only for rescue administrations.
- Is not intended to require court sanction before it can take effect.
HMRC changes to policy
In a document published on 27 March 2020 HMRC has put in place the following policy.
- HMRC will not petition for winding up or bankruptcy for the time being.
- HMRC supports a 3-month break in contributions in all existing voluntary arrangements, including any variation to that effect, and encourages supervisors to exercise their fullest discretion to assist the debtor.
- Any deferral of VAT payments under the Government’s Covid-19 VAT deferral scheme (details here) will not generally be treated as a breach of the arrangement.
The developments and reforms set out in this bulletin are untested. Many of them will trigger radical changes to the insolvency legislation and the way that we litigate, just as the pandemic has forced fundamental and lasting changes to our economy and way of living.
Should you require any assistance in relation to the contents of this bulletin, our contact details can be found above.