Insolvency has become more of an issue then perhaps it has been for many years due to the outbreak of the pandemic. With businesses in many cases forced to close due to government action the possibility that an insolvency situation may arise has become an increasing reality for many organisations. As they have been forced to cease trading in some case, though hopefully on a temporary basis, their very survival is threatened due to circumstances completely beyond their control. It is therefore understandable that anyone caught in this highly undesirable situation wishes to have some protection from being forced into an insolvency scenario when they have done little if anything to bring such an eventuality about by their own actions.
Neither does the government want businesses to fail. Obviously this would have major economic consequences and severe repercussions for unemployment and other connected issues. Equally there is a clear and obvious political fallout if businesses were to fail largely because they have been compulsorily closed down by government action. This is probably behind the introduction of a Corporate Insolvency and Governance Bill that has been introduced to Parliament. This has the aim of making both temporary and permanent changes to the UK's insolvency framework. Even though it may be the coronavirus pandemic which has led to the Bill being created, its changes – if passed - will long outlive it.
Perhaps the most radical change to the existing law is the introduction of a new approach to restructuring plans. These will now allow for insolvencies to be carried out using what is rather clunkily called a 'cross-class cramdown'. This is similar to the existing Company Voluntary Arrangements (CVAs) which already exist but they add a further degree of sophistication. Under a CVA, creditors are put into various classes which are deemed to represent groups with similar interests. One of these groups of creditors can currently hold out during insolvency proceedings in the hope that they may obtain a better deal by so doing. The cramdown procedure will prevent this from happening in the future. If other classes are in favour of a proposed restructuring and a judge is happy with the scheme, any restructuring can be voted through even against the wishes of a group of creditors who is in disagreement with it. In many ways it mirrors the well-known American Chapter 11 Bankruptcy model. One can already see some potential complications with the scheme though. It is important that larger groups do not have the ability to bulldoze through restructurings which are in their favour but ignore the legitimate concerns of other smaller groups whose protection is potentially somewhat diminished by the changes proposed to the existing insolvency laws. This puts a big onus on judges to watch out in particular for the interests of the smaller groups and the final legislation must, it is hoped, make clear that no group should be unreasonably disadvantaged as a result of the changes.
This is one example of a proposed change which is likely to have an ongoing impact on the insolvency situation going forward. A good example of a proposed amendment which will have more of a temporary impact is the short-term suspension of wrongful trading that is proposed. It is well known that under normal circumstances it is an offence for company directors or owners to continue to trade beyond the point where they know that insolvency is inevitable. The financial impact of the lockdown has muddied the waters as to whether or not a company is insolvent, making it much harder to form a reliable opinion. The proposed changes would suspend the wrongful trading provisions as they are currently framed between the period of 1 March and 30 June 2020. However, some caveats should still be applied. For example, if directors were to trade fraudulently then quite rightly they would not be absolved of their responsibilities by this suspension. In addition to this suspension, a temporary ban has been placed on any winding-up petition being actioned between the period 27 April and 30 June 2020. This will have the impact of protecting companies from winding-up actions for a while but some analysts feel that it is only pushing the problem marginally down the road. Once we reach July, then all bets are off and there is a risk at that stage that there will be a significant increase in the number of winding-up petitions which could be tabled unless further amendments to the law are proposed in the meantime. As in this case as in so many others concerning the virus, its medium and long-term consequences are very uncertain indeed.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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