Insolvency During a Pandemic

By Wanida Costello


Over the last 12-months, UK businesses have suffered tremendously as a result of the COVID-19 pandemic. As seen in many news outlets, the non-essential retail and nightlife industries have been hit the hardest due to lockdown restrictions. Top companies such as the Arcadia Group, Peacocks & Jaeger and Debenhams have made headlines recently, with their stores shutting nationwide and thousands of jobs lost after falling into administration. This is seriously problematic for wider society as it vastly permeates a number of things: employment; pensions; individual bankruptcy; suppliers and directors’ liability.


WHAT HAS THE LAW DONE?

To aid struggling businesses, the Corporate Governance and Insolvency Act 2020 (the ‘Act’), was enacted and came into force on 26th June 2020. The aim of the Act was to provide a combination of permanent and temporary relief measures for businesses adversely affected by the pandemic. Most temporary measures have since been extended until 30th March 2021. Some of the key provisions include:


  • A new restructuring plan making it easier for qualifying companies to cope with debts. The new plan will allow a “cross-class cram down” approach, meaning it can be imposed by the court on even dissenting creditors (permanent).

  • A moratorium - essentially a ‘break’ for companies to allow them to organise their finances without creditors taking action against them unless they have obtained permission from the court (permanent).

  • A prohibition on termination clauses (‘ipso facto clauses’) as a result of insolvency procedures. This prevents suppliers from reneging on their obligations to supply goods or services subject to safeguards (permanent).

  • Statutory demands for winding-up due to COVID-19 will be void if served between 1st March 2020 and 31st March 2021 (temporary).

  • The wrongful trading rules will be suspended between 1st March 2020 and 30th September 2020, which has since been re-introduced from 26th November 2020 to 30th April 2021 (temporary).


IMPACT ON INSOLVENCY PROCEEDINGS

As many creditors are inhibited from taking possession of their security or from taking any legal action against the insolvent company, there will be a significant decrease in insolvency proceedings. In fact, according to recent government statistics, overall company insolvencies decreased by 50% in January of this year compared to the same month in 2020. This can be attributed to the Act coming into force last year and helping to prevent a large number of companies from having to enter into insolvency procedures (that would have if the Act had not been in place).


IMPACT ON THE LEGAL PROFESSION

As this is such a highly relevant issue in the UK’s current financial climate, insolvency practitioners and restructuring lawyers will need to remain up-to-date with the Act and future changes to insolvency laws that are likely to occur. With so many high-profile companies experiencing financial difficulty due to COVID-19 as well as other reasons, it is not surprising that there will likely be more enquiries from clients regarding their financial position and the survival of their businesses.


HOW TO ADDRESS IN AN APPLICATION OR INTERVIEW

In order to demonstrate your knowledge of this area, consider practical points that a company ought to consider when going through financial difficulty. Look at both the insolvent companies’ side and the creditors’ side. Consider the internal and external factors that have affected the business. What are their options? Outline them, explain their strengths and weaknesses, and advise on what you think would be the most appropriate action.


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