The moves announced by the business secretary may be the tip of the iceberg, says David Fleming FCCA of Duff and Phelps
For many company directors, the proposed changes announced on 27 March to UK company law, to enable companies undergoing a restructuring/rescue process to continue trading, are a welcome relief.
While the announcement provides limited details, we know that it will include the temporary suspension of wrongful trading provisions, along with other moratorium measures. For many otherwise viable businesses, it provides vital time to make maximum use of the many government support packages, enabling firms to trade through the coronavirus crisis.
In his announcement, Business Secretary Alok Sharma MP said: ‘Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.’
Among the measures announced, companies will be able to continue buying supplies, including raw materials, while attempting a rescue. In addition, wrongful trading provisions are temporarily suspended retrospectively from 1 March 2020 for three months.
This last provision is important for company directors so that they can continue to make decisions to save their businesses without the threat of personal liability.
The two core areas outlined by the business secretary include:
The temporary suspension of wrongful trading provisions for company directors to remove the threat of personal liability during the Covid-19 pandemic apply retrospectively from 1 March 2020. The current wrongful trading rules have caused particular concern to many directors, given the risk of personal liability if they fail to take steps to minimise potential losses to creditors once there is no reasonable prospect of avoiding an insolvent liquidation/administration. This in turn may have required directors to commence insolvency proceedings prematurely.
This does not alter the steps that a director should take when assessing the financial health of the business. Despite this change, directors will remain subject to scrutiny. The rules pertaining to the directors' disqualification regime and laws on fraudulent trading remain firmly in place.
Directors must continue to act responsibly. This in turn means that they do all they can to reasonably protect value for creditors and minimise loss. Further, they should take every step possible to continue to trade in accordance with their wider duties as directors.
From a practical perspective, directors will need to continue to record and minute decisions they are making during this period with a rationale to avoid future misinterpretation. A focus on how creditors are being protected during the Covid-19 period should be referenced to demonstrate the steps the directors are taking.
New restructuring plan and moratorium
In August 2018, the government announced plans to introduce new restructuring procedures. The government intends to fast track these plans, which would give UK companies an initial 28-day moratorium period to provide breathing space to formulate a rescue plan or restructure. It would also aim to protect the companies’ supplies, be binding and provide the ability to accept new funding during the moratorium period.
Currently, an administration process can provide protection via the use of a moratorium, as can a small company CVA, although both result in a formal insolvency process and all the negative aspects associated with these restructures.
New legislation providing short-term protection from winding up petitions or other creditor actions would be welcome while a solvent restructuring plan is drafted and agreed with supporting forecasts. The key difference during Covid-19 is that there have been viable and profitable businesses that have seen their revenues disappear overnight, and they are struggling to control the cashflow and losses being sustained on a monthly basis. A period to formalise a plan to support during the lockdown period would protect businesses and likely provide better outcomes to creditors and supply chains, when compared to the other insolvent options.
However, there are practical implications such as how you protect the access to supplies during this period, the impact on the asset-based lending market on the funding of supplier invoices, and the knock-on to the credit insurance market.
To date, many of the businesses we have been working with are managing to utilise the government initiatives to manage short-term cashflow and are effectively ‘mothballing’ their businesses without the need for protection. Creditors are not taking action against companies, banks and asset-based lenders are being supportive, HMRC is allowing deferrals of taxes and landlords are negotiating on rent. How long this support can last is unknown, and while the government support has provided help for many businesses, there is likely to be more debt on UK balance sheets when we finally exit from Covid-19.
With regards to the new legal changes for the restructuring professionals, the challenge now is how fast these can be made to UK corporate law. There was no announcement on the exact timings and Parliament is currently in recess until 21 April. The business secretary stated that the exact details of the measures will be set out in new legislation.
Given the speed of change we are seeing at the heart of government, these might not be the last of the reforms to the existing legal framework. We could potentially see a flattening out of the global insolvency framework, moving to a more level, fairer trading field. In doing so, the international business community – and the small and medium-sized enterprises they support – will be better placed to restart, rebound and return to trading.
David Fleming FCCA, Managing Director, Advisory , Duff and Phelps