Insolvency changes afoot

The UK Government is planning to introduce a number of major insolvency reforms through the Corporate Rescue and Insolvency Bill.

One of the key proposals is to limit the right to terminate following the insolvency of a party to the contract. This is a potentially major change and I will do a separate blog on this shortly.

In the meantime, there are some significant temporary provisions limiting the steps creditors can take which are designed to cushion debtors in the short term from anticipated economic effect of the COVID-19 pandemic. They are:

1. Voiding statutory demands served between 1 March and 30 days after the bill comes into force - effectively preventing debt collection via an insolvency process;
2. Adding hurdles to winding up petitions presented during the same period - it will still be possible to present winding up petitions on other grounds during that time, but a creditor must have reasonable grounds for believing that coronavirus has not had a financial impact on the company or that the facts giving rise to the grounds would have still existed even if the coronavirus had a financial impact - this will undoubtedly be difficult to make out, or give sufficient scope for delay and dispute to question whether this is worthwhile;
3. There will be a presumption that for the purposes of wrongful trading, a director is not responsible for any worsening of the financial position of the company or its creditors that occurs from 1 March 2020 to 30 days after the bill is passed which may give directors confidence they need to keep the business going.

The bill may well be in force before the end of June and if so, any creditor owed money by companies struggling as a result of the pandemic will find their rights restricted (at least on a temporary basis). The clear policy line is that aggressive debt collection is off limits, at least until well into July, and a creditor who does proceed does so at their own risk.