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What next for restructuring and insolvency?

Retail, hospitality and travel are among the sectors facing enormous commercial challenges in the face of steeply falling consumer demand thanks to COVID-19.

In response, at the end of March, the UK Government announced new measures giving businesses that can’t meet debts because of the impact of the pandemic greater leeway to continue trading.

While the details of these UK-wide proposals are still to be seen, here’s what we know so far.

The government’s proposals broadly cover two aspects — the suspension of wrongful trading and a temporary moratorium for businesses undergoing a restructuring process.

Temporary suspension of wrongful trading

Alok Sharma, the UK business secretary said the wrongful trading law would be suspended to protect directors during the pandemic. My colleague Rebecca Walker blogged about this recently.

Sharma said the legislation would retrospectively apply from the beginning of March and would allow businesses to continue to trade while they explored rescue options which would help them avoid insolvency.

As Rebecca said, very little detail is available at the moment as to how the measures will work, particularly how suppliers will be encouraged to keep working with businesses in financial difficulty.

Hopefully further guidance will be issued shortly with detail too on whether any safeguards will be built in to prevent abuse.

Welcoming the announcement, the Scottish Government said suspending wrongful trading will give directors the confidence and reassurance to make difficult decisions about the future viability without the fear of action being taken against them in the event they enter insolvency proceedings.

Moratorium on due diligence

This proposed new regime is designed to prevent creditors from taking enforcement action while a business is looking at rescue or restructuring options, and means they can still access the goods and services they need to carry on trading.

Again, it will be useful to see the detail, but a key question will be how we balance the obvious need to protect these businesses with the equally obvious need to protect their supply chain.

Meanwhile the Coronavirus (Scotland) Act 2020 has introduced an extended moratorium for individuals. A debtor can apply to the Accountant in Bankruptcy (AIB) for a moratorium on creditor diligence which gives them a period of protection from enforcement.

If successful, a creditor can’t instruct the usual diligence measures such as charge for payment or enforce any court orders. This scheme temporarily extends the duration of a moratorium to six months from six weeks.

This is significant because debtors now have considerably longer to get their affairs in order. But it’s also significant for creditors: at present, sheriff officers are only dealing with emergency civil business, which means creditors are already having difficulty enforcing court actions and carrying out diligence.

What next?

It seems those businesses already struggling before the pandemic are likely to be pushed to the brink, and even those who were relatively successful beforehand face enormous pressures.

There are serious concerns, despite positive measures announced by the government, that cash such as furlough payments and business interruption loans won’t arrive quickly enough. Plus, another real difficulty now for businesses is forecasting — we don’t know yet when the lockdown will end. What restrictions will remain afterwards and for how long?

What will customer demand look like in the short to medium term? And what support will a business ultimately be able to access, and by when?

With so many questions unanswered, the general feeling is that it might take a month or two before companies go into formal insolvency processes, but things could be hastened if cash runs out meantime.

As with much coronavirus-related that we’re covering at the moment, watch this space.

Tim Thomas

Aberdeen-based partner Tim specialises in commercial litigation and insolvency law and is highly experienced in a range of commercial disputes in Scotland’s sheriff court and Court of Session.

Posted, 20 April 2020 by Tim Thomas
Categories: Bankruptcy and insolvency law | Coronavirus | Coronavirus and insolvency | Debt recovery | Insights