Restructuring Insolvency

BHS: Key Takeaways for Insolvency Practitioners

Mon, 21 Oct 2024 14:21:00 +0100

In this article, we examine the key takeaways for insolvency practitioners (IPs) arising out of this decision in light of the significant amounts ordered to be paid by the directors personally to the high street retailer's insolvent estate for the benefit of creditors.

Background

In March 2015, the British Home Stores Group (the Group) was purchased by Retail Acquisitions Ltd (RAL) (the Purchase). Notwithstanding the Group's longstanding status as a UK retail stalwart, the Purchase was completed for a nominal price of £1 reflecting the Group's significant pension deficit and successive trading losses. Shortly after, following an unsuccessful attempt to negotiate a CVA with their creditors, the four companies which comprised the Group went into administration in April 2016. Those companies then subsequently entered liquidation. The Group's inability to meet its liabilities and, in particular, its pension obligations, meant that individuals and entities connected to the business including its directors, shareholder and former shareholder were subject to significant regulatory scrutiny. Separately, in December 2020, the joint liquidators of the Group (the Joint Liquidators) issued claims against certain of its former directors (the Directors) in connection with their running of the business alleging that they were liable for misfeasance and wrongful trading under sections 212 and 214 respectively of the Insolvency Act 1986 (the IA 1986) (the Claims).

The Claims

s.212 IA 1986

The Joint Liquidators' route to establishing liability for misfeasance was twofold. They argued that the Directors had breached (i) various of their statutory duties in connection with various individual transactions and also (ii) their duties under section 172 of the Companies Act 2006 (CA 2006), by continuing to trade more broadly (the Misfeasance Trading Claim).

s.214 IA 1986

Under section 214 IA 1986, the Joint Liquidators argued that the Directors knew or ought to have concluded that the Group had no reasonable prospect of avoiding insolvent liquidation or administration (the Knowledge Condition) from their appointment on or about the date of the Purchase or, alternatively, by some later date prior to the Group entering into administration. The Joint Liquidators further particularised their claim following an interim hearing and put forward six specific dates on which they considered the Knowledge Condition to be satisfied between 17 April 2015 and 8 September 2015 (the Knowledge Dates).

The Decision

s.212 IA 1986

The Misfeasance Trading Claim was, in part, based on the Directors' failure to have regard to the interests of the Group's creditors by approving entry into a secured loan facility on 26 June 2015 (the Secured Loan) in breach of their duty under s172(3) CA 2006 (the Modified Duty).

The judgment of the Supreme Court in Sequana sets out key principles governing the engagement of the Modified Duty. We have previously commented on this in a separate article.

In essence, Sequana confirms that there is a common law rule requiring directors, once a company reaches a certain level of financial distress, to consider and to give appropriate weight to the interests of creditors, balancing them against shareholders' interests where they may conflict. This duty is triggered once a company is insolvent, bordering on insolvency or an insolvent liquidation or administration is probable. This can potentially be at an earlier time than when directors may face liability for wrongful trading under section 214 IA 1986.

Justice Leech found that the Directors did not consider the interests of the Group's creditors prior to approving entry into the Secured Loan. On this basis, he had to consider, applying the Notional Director Test (described below), whether reasonable directors, who had properly considered the interests of creditors and given them appropriate weight, would have decided that the interests of those creditors were paramount and, if so, whether it was in their interests to enter into the Secured Loan.

It was noted that, at the time the Secured Loan was approved by the Directors, the unsecured creditors (and not RAL) were exposed to considerable risk. This was because the cost of the onerous and expensive Secured Loan would erode and then exhaust the Group’s property assets if it could not be repaid. It was also noted that the Directors should have known that there was no reason to believe that the Group's financial situation would be better by the next quarter because its parent company had been previously unable to obtain a sustainable working capital facility. Justice Leech therefore held that reasonable directors would have concluded that the interests of the Group's creditors were paramount and that entry into the Secured Loan was not in their interests. As such, the Directors were in breach of their statutory duties. The judge considered that, had the Directors complied with their duties, the Group should have gone into administration and not entered into the Secured Loan. At a separate hearing in August 2024, the Directors were ordered to pay £110,230,000 on a joint and several basis into the Group's insolvent estate. We have explored the key takeaways from this decision in this article.

Justice Leech also found that the Directors were in breach of their statutory duties in respect of 4 individual transactions which, broadly, related to the payment of monies to the Directors themselves or various connected parties such as RAL.

s.214 IA1986

In deciding whether the Knowledge Condition was satisfied, the court determined that the correct test to be applied was the standard of a reasonably diligent person having both (i) the general knowledge, skill and experience reasonably expected of a person carrying out the same functions as the Directors and (ii) the general knowledge, skill and experience that they actually have (the Notional Director Test).

Applying the Notional Director Test, Justice Leech dismissed the Joint Liquidators' Claim in respect of the first five Knowledge Dates.

However, he accepted that by 8 September 2015 the Knowledge Condition was satisfied on the basis that, among other things, the Directors were aware that the Group’s business had been loss-making for some time and its funding options were severely limited especially because RAL was not able to replicate the financial support provided by the Group's former shareholder. As such, the Directors were found guilty of wrongful trading in respect of the final Knowledge Date (8 September 2015). They were ordered to pay £6.5 million each towards the increase in the net deficiency of the Group's assets between 8 September 2015 and 25 April 2016 when the Group went into administration.

Key takeaways for IPs

Misfeasant Trading and timing

This case was highly significant in that it was the first time that the directors of a company have been found guilty of the novel claim of 'misfeasant trading'. The financial quantum of the award was also of note, with the Directors, prima facie, facing judgment of circa £110 million.

The Knowledge Condition provides a high bar for establishing liability for wrongful trading requiring that directors know or ought to know that a company has no reasonable prospect of avoiding insolvent liquidation or administration. However, the Trading Misfeasance Claim relied on the directors' breach of their statutory duties, including the Modified Duty, which may potentially be engaged at an earlier point in a company's financial distress, such as when insolvent liquidation or administration is merely "probable" (adopting Lady Arden's formulation in Sequana).

The effect of this is demonstrated in the BHS case where liability for misfeasance trading was established approximately three months before the Directors' liability for wrongful trading. Whilst each claim will be fact specific, the fact that liability for misfeasance trading can be established earlier than a claim for wrongful trading does, arguably, make such a claim easier to bring. We therefore expect that IPs may, when there is a suggestion of director wrongdoing, carefully analyse whether there are grounds for bringing a misfeasant trading claim in addition to any action for wrongful trading.

Professional advice

The Directors sought to rely on the fact that the Group received advice from prominent professional service firms, including in relation to directors' duties, to avoid liability for wrongful trading.

Whilst such action usually provides some level of insulation to directors against claims of wrongful trading and misfeasance, Justice Leech rejected the arguments put forward by the Directors in this instance. In consequence, the decision has led some commentators to question the value of professional advice and suggest that it will encourage IPs to bring claims against directors even where thorough advice has been received.

However, in the BHS case, it was clear from Justice Leech's findings that the Directors did not properly consider the advice that they had received at board meetings and that they had failed to provide all of the relevant information to their advisors. It is therefore unsurprising that the judge placed limited weight on the advice. It is notable that he commented that, in ordinary circumstances, namely, where advice is received, considered and followed, a director goes a long way towards discharging their duties. As such, IPs will continue to need to carefully evaluate the full factual and legal position when assessing potential wrongful trading claims where directors have clearly received, assessed and followed informed professional advice.

D&O cover

The Directors argued that their liability should be capped by reference to the amount of D&O cover they had or the amount each could afford to pay. However, this argument was rejected as Justice Leech observed that it would leave creditors without recourse and encourage directors to take risks. This is good news for IPs who can take a certain level of comfort from this judgment that their recoveries will not be limited as a result of a director's failure to obtain adequate insurance coverage or their inability to pay any sums awarded although the recovery of any residual direct liability will be limited to the value of the defendant's personal assets.

Against a Backdrop of Rising Corporate Insolvencies HMRC Joint and Several Liability Notices: Should Directors be Concerned?

Tue, 11 Apr 2023 16:29:00 +0100

Where this is the case, the directors of those companies will need to be increasingly mindful of the duties they have to the company's creditors, as well as to its shareholders.

One important creditor in this regard is often HMRC. This is because HMRC was recently elevated to preferential creditor status for certain debts and granted powers to issue joint and several liability notices ("JLNs") against directors of insolvent companies.

What are Joint and Several Liability Notices?

JLNs make individuals (such as directors) jointly and severally liable for a company's (or an LLP's) tax liabilities. This means that any one of those individuals may be pursued for all or part of the tax debt, unless the company (or LLP) no longer exists, in which case the individual is wholly responsible for the debt. This can obviously have significant implications for any individuals who are served with such notices.

The Finance Act 2020 empowered HRMC with effect from 22 July 2020 to issue JLNs to directors where, subject to the satisfaction of certain other conditions:

the company of which they are a director (i) has entered into tax avoidance arrangements or engaged in tax-evasive conduct and (ii) is subject to an insolvency procedure or there is a serious possibility of it becoming subject to one; or
the directors have, at any time during the five-year period ending with the giving of the JLN, been involved repeatedly with companies which entered into an insolvency procedure with unpaid tax liabilities.

An ‘insolvency procedure’ for these purposes is relatively widely defined and includes:

A winding-up / a liquidation

Note that a members' voluntary liquidation is only treated as an insolvency procedure if "a period of 12 months beginning with the day on which the winding up commenced has expired without the company having paid its debts in full together with interest at the official rate" or the company has been wound up without paying its debts in full.
An administration
A receivership
A company voluntary arrangement or scheme of arrangement (but not a Part 26A Restructuring Plan)
A corresponding overseas insolvency procedure equivalent to any of the above.

However, an ‘insolvency procedure’ does not include a Part A1 moratorium, the new corporate 'breathing space' restructuring tool introduced as part of the Corporate Insolvency and Governance Act 2020 reforms.

Importantly, JLNs may only be given in cases of repeated insolvency where the total unpaid tax liabilities from the old companies (i) exceed £10,000 and (ii) represent at least 50% of the total amount of those companies' liabilities to their unsecured creditors.

In addition to the powers set out above, if a company is subject to an insolvency procedure or there is a serious possibility of it becoming subject to one, HMRC may, in certain circumstances, also issue JLNs to the directors to recover COVID-19 support payments which that company was not entitled to receive.

Anyone who receives a JLN may ask for either an HMRC internal review or appeal the JLN within 30 days of the notice being issued.

Why is this particularly relevant now?

The level of corporate insolvencies is expected to rise in 2023 as more and more businesses struggle with the post-pandemic economic landscape. Contributing factors have been high energy prices, elevated inflation, rising interest rates, labour shortages and global economic weakness following the coronavirus pandemic.

According to National Statistics by the Insolvency Service, the total number of corporate insolvencies in England and Wales in February 2023 was not only 6% higher than the previous month's figure but also 17% and 33% higher than the corresponding figures for February 2022 and February 2020 respectively.

Volatility in the global economy has been highlighted recently with the dramatic developments in the banking sector, including the collapse of Silicon Valley Bank and the emergency rescue of Credit Suisse by UBS.

Alongside the backdrop of this financial uncertainty, there has also been increased focus by the UK Government on the investigation and recovery of sums incorrectly obtained under the COVID-19 loan support scheme.

With these heightened levels of financial stress and, by extension, the potential for an increase in the number of corporate insolvencies, directors of companies may find themselves at greater risk of being issued with a JLN. This risk extends to shadow directors (i.e., those individuals who, although are not registered as directors, may nevertheless be deemed to direct or instruct a company) and certain other individuals concerned with the management of the company.

What can I do?

As shown from the above, JLNs can have a wide application and lead to serious financial consequences for those involved. Therefore, directors and anyone who might run the risk of being issued with a JLN need to be aware of the provisions and the risks involved.

If you are concerned about your company's ability to meet its tax liabilities or its liabilities generally, particularly in today's challenging economic times, and/or have any concerns that you may be at risk of being issued with a JLN, we would always recommend seeking expert financial and legal advice as soon as possible and invite you in the first instance to contact members of RPC's Restructuring and Insolvency team.

BTI 2014 LLC v Sequana SA and others – Supreme Court decision

Thu, 06 Oct 2022 09:47:00 +0100

The Supreme Court considered the circumstances in which company directors must exercise their duties under s.172 Companies Act 2006 (CA06) with regard to the interests of the creditors and affirmed the position reached by the Court of Appeal.

Comment

The Judgment underlines that the significant question faced by directors of whether (and when) they must exercise their duties with regard to the interests of creditors, and how that should be done, remains something on which they should take legal advice. There is no one definitive "trigger point" for that and directors will need to consider the exercise of their duties in the wider context of the company's then position and its future prospects.

It is also clear that there are also circumstances where the interests of both creditors and other stakeholders will need to be considered at the same time and balanced against each other.

In practice, directors of distressed companies should take early advice from legal and financial professionals to understand their duties and ensure compliance with them.

Background – Court of Appeal decision

The Court of Appeal had decided, amongst other things, that directors must exercise their duties with regard to the interests of creditors from the point at which they know or should have known that a company is or is likely to become insolvent. In that context “likely” means “probable” or in simple terms a greater than 50% prospect.

Supreme Court Judgment

The Supreme Court outlined four issues which it considered when making the Judgment which included the following:

Is there a common law creditor duty at all?

The Supreme Court held that there was a creditor duty that is supported by case law and s.172(3) CA06. The Supreme Court noted that a creditor's economic interest increases when a company is insolvent or nearing insolvency; at which point, a director should take that interest into account and avoid prejudicing it.

What is the creditor duty?

In its Judgment, the Supreme Court confirmed that:

"Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs. In those circumstances, the directors should have regard to the interests of the company’s general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary."

Once an insolvency process is inevitable the interests of creditors will be paramount as they will have the sole economic interest in the company.

When is the creditor duty engaged? Was it engaged on the facts of this case?

The Supreme Court held that the duty to consider creditors' interests arises when directors know, or should know, that the company is insolvent or bordering on insolvency or that insolvent liquidation or administration is probable. It is not enough that insolvency itself, from which the company might recover, is probable.

However, although touched upon by the minority, the Court have left open the question of whether it is essential that the directors know or ought to know that the company is insolvent or bordering on insolvency or that an insolvency process is probable.

Corporate bankruptcy and insolvency litigation roundtable

Thu, 09 Sep 2021 11:01:00 +0100

Paul Bagon joins a group of bankruptcy and litigation experts from the United Kingdom and United States in this roundtable feature published by Financier Worldwide Magazine to explore trends they have observed and examine what’s next for businesses that may find themselves navigating bankruptcy and insolvency disputes and what they need to know going forward.

Carluccio's serves up a rescue recipe

Tue, 28 Apr 2020 17:47:47 +0100

During this session, our Insolvency Partner Paul Bagon discussed the recent High Court judgment involving Italian restaurant chain Carluccio's, which entered administration at the end of March.

Paul also focussed on the Coronavirus Job Retention Scheme and how this impacts both employees and employers in the context of corporate insolvency. During this quick-fire session we explored:

furloughing
administration
and the Carlucccio's judgment

If you have a question relating to any of the topics discussed during this webinar please get in touch with Paul Bagon or any member of our Restructuring & Insolvency team. If you are interested in attending our next Click and Reflect webinar please email us at webinars@rpclegal.com.

Watch the full webinar here:

COVID-19: the supply chain

Mon, 20 Apr 2020 12:23:07 +0100

In August 2018, following the collapse of Carillion, the Government announced that it would legislate to prohibit the enforcement of clauses in supplier contracts which allow a contract to be terminated on grounds that one of the parties to it has entered formal insolvency. Legislation prohibiting the exercise of so called ipso facto clauses has not yet been published and now, as a result of the pandemic, supply chains have become even more vulnerable.

Restrictions on travel, forced closures, reduced demand for certain types of goods, rules on social distancing and sickness induced quarantine have made the performance of many supply contracts and the viability of market participants very uncertain. Businesses find themselves at risk of financial loss flowing from non-performance by suppliers or non-payment by customers.

The Government has published guidance for public bodies on supporting 'at risk' suppliers by maintaining cash flow and protecting jobs. While this is a welcome development, what guidance is there for private sector suppliers who are also at risk?

Existing rights

There are, of course, existing ways in which a business can look to protect itself from non-payment by a counterparty. They include hedging by way of factoring, invoice discounting and/or credit insurance, the exercise of contractual rights, and, as a last resort, using debt enforcement via statutory demands and winding-up petitions.

Debt enforcement continues to operate in the ordinary course and the courts are continuing to hear winding up petitions – albeit it at a slower rate. Businesses, however, may be concerned about the negative publicity that may arise from issuing a petition against a counterparty struggling as a consequence of COVID-19 in addition to being wary about the damage that taking such steps may cause to commercial relationships. In any event, the winding up of a counterparty that has not been trading or generating revenue during the pandemic may see minimal returns to creditors and certainly where such debts are unsecured.

It is common for supply contracts to contain protections against insolvency or non-payment by a counterparty; in particular, through the inclusion of retention of title (RoT) provisions. In short, RoT allows a supplier to repossess its goods on the occurrence of contractually specified events – usually either non-payment or counterparty insolvency. The repossessed goods can then be resold or repurposed.

In respect of existing debts, companies are advised to review their terms and consider the availability of self-help remedies such as reliance on RoT provisions. In respect of future supplies, businesses should be ensuring that their terms contain RoT rights and that:

those rights are triggered at the earliest opportunity – e.g. on non-payment rather than only on the occurrence of formal insolvency. This is key given that the government support package may see counterparties pause economic activity whilst maintaining a going concern status;

the RoT rights are "all monies" – i.e. the right to repossess applies to all outstanding amounts and all goods held by the counterparty; and

that the counterparty retains sufficient operational staff and resources to maintain the insurance, security and storage of the goods subject to RoT.

However, care should be exercised; the enforcement of RoT rights makes sense for goods that are not perishable and can be resold. Businesses should be alive to the additional costs of insurance, storage and security for repossessed goods that they may not be able to resell quickly or possibly at all.

As a practical matter, suppliers should take steps to ensure their goods are easily identifiable and, while observing social distancing, consider their options to assess actual stock levels held by the customer so that logistical risks are minimised on the enforcement of RoT rights.

Typically, credit insurance policies will protect insureds from non-payment by customers due to defined events, which may include the insolvency of the customer, protracted uncured defaults or actual defaults. Suppliers with existing credit insurance should familiarise themselves with their policy terms and conditions and adhere to them, particularly with regard to reporting late-payment triggers and ensuring compliance with any mitigation actions required by the policy.

Improving rights

In the present circumstances, renegotiation and augmentation, rather than termination, could appeal to both parties to a supply contract, even if it results in less attractive terms than those in the existing contract. Such steps will maximise the opportunity of preserving commercial relationships allowing the resumption of ordinary course trading after the COVID-19 crisis ends. Parties who agree to renegotiate should establish from the offset whether their discussions will be subject to contract, i.e., they will not be binding until a formal contract has been agreed. Once agreed, the new terms should be recorded formally in writing and any contractual provisions on variation should be complied with.

Parties may seek to negotiate the inclusion or expansion of RoT rights, the taking of security or varied payment terms. We do not consider those options in detail here but businesses should carefully consider whether anything obtained from a counterparty will survive a subsequent insolvency event.

Any improvement to an ongoing contracting position or in respect of previous indebtedness will require careful consideration and advice. As we have previously reported despite the relaxation of the wrongful trading provisions in response to the pandemic, all other Insolvency Act provisions remain in force.

COVID-19: Good news on wrongful trading provisions but why should directors tread carefully?

Thu, 09 Apr 2020 17:01:26 +0100

The Government's measures were focussed on protecting directors from personal liability for wrongful trading and a proposed moratorium to allow businesses to refinance or restructure free from creditor action or enforcement. (Click here to see our update on these measures).

The policy objective of both these measures is to push back the point at which companies need to enter into insolvency either due to pressure on directors or from external sources. While those steps are welcome, and should ensure that fewer companies enter insolvency procedures precipitously during the pandemic, there are still numerous other issues facing directors where boards are advised to seek professional support.

Liquidity

One of those will be liquidity, with companies still facing significant liquidity issues in the absence of trading or non-payment by customers facing their own difficulties and seeking to protect their own cash reserves.

The government has sought to address this through a number of financial support packages; most notably the Coronavirus Business Interruption Loan Scheme (the Scheme) aimed at SMEs. The detail of the Scheme, and recent action by the government to address market criticisms of it, can be found in this update from RPC.

In addition, many companies will have headroom within existing facilities so that additional funds can be drawndown to either fund operations or to hold as reserves. Any such further drawdowns will likely be subject to repetition of warranties and / or covenant assessments by lenders.

What do directors still need to be aware of?

While the liability for wrongful trading has been relaxed, the remainder of the directors' duties regime remains intact and must be complied with. In particular, when electing to access additional capital directors must be mindful of their duties to either the company's members or where the company is facing significant distress to its creditors as a whole. Taking additional borrowing and providing assurances to lenders are areas where directors will need to proceed with particular caution and seek legal advice. Also, breaches of duty can attract personal liability even with the relaxation of wrongful trading rules.

There will also be circumstances where affiliates may wish to allocate financial resources across a group. While directors will already be aware of the rules that apply to such arrangements, they will need to give careful thought to the following:

The appropriateness of paying intra-group dividends to move cash at a time of financial uncertainty and where operational revenue and expense may be difficult to project.
The avoidance of conflicts where directors sit on multiple companies within a group – a point that arises in "normal" times but one that will be in sharper focus now.

Ascribing appropriate consideration for any assets transferred intra-group. Again, this applies in all circumstances but must be carefully considered at the present time where there has been no relaxation of claw back rules on insolvency and where ascertaining the proper value of the asset(s) and the solvency of the transferor may be problematic.

Again, any breaches by directors can give rise to personal liability outside of the change to wrongful trading. On a practical level, directors should be taking proper advice on any of these actions and documenting carefully the decisions taken and the rationale for them.

COVID-19: The suspension of wrongful trading provisions and a moratorium for businesses in restructuring – what is the likely impact on your business?

Tue, 31 Mar 2020 09:43:32 +0100

In a welcome intervention, the Business Secretary declared it was the government's intention to suspend wrongful trading provisions and to introduce a moratorium for businesses undergoing a restructuring process. Both measures are intended to assist companies to trade through financial distress caused by the loss of business due to the COVID-19 pandemic.

At this stage there is little detail in respect of the proposed legislation with the Business Secretary stating that such legislation would be introduced "at the earliest opportunity". Nevertheless, RPC restructuring and insolvency partner Paul Bagon commented: "the government's intention to introduce new measures to suspend director liability for wrongful trading will be welcome news to boards of directors around the country who are faced with unprecedented difficulties in assessing the ongoing viability of otherwise financially sound companies that are faced with the unexpected prospect of significantly reduced revenue for an unknown period of time".

Temporary Suspension of Wrongful Trading

In these uncertain times directors have become increasingly concerned about the risk of personal liability that can arise in respect of wrongful trading. Under current legislation a director can be liable if they are found to have continued trading a business and did not minimise losses to creditors at a time when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration.

The Business Secretary announced new legislation would be introduced to grant a temporary suspension of the wrongful trading provisions, which would take effect retrospectively from 1 March 2020.

Prior to the announced measures, wrongful trading provisions provided protection to creditors by imposing personal liability on directors of insolvent companies that continued trading beyond a time at which there was no reasonable prospect of the company avoiding insolvency. The aim of the proposed temporary suspension is to allow directors to continue trading distressed companies affected by the COVID-19 crisis without the risk of personal liability even in circumstances in which there is little clarity about the future prospects of the company avoiding insolvency due to uncertainty regarding when the COVID-19 crisis will end. Consequently, the measures should reduce the number of unnecessary and likely terminal corporate insolvency filings and allow viable companies to trade through the COVID-19 crisis and recover once normal trading activities resume.

One of the most difficult directors' duties decisions faced by boards of distressed companies relates to whether to drawdown on unutilised headroom under revolving credit facilities to provide much needed liquidity at a time when there is uncertainty about a borrower's ability to avoid insolvency. The relaxation of wrongful trading provisions during the COVID-19 crisis should enable directors to more easily evaluate such decisions and in so doing reduce the prospect of large numbers of companies becoming cashflow insolvent. Each such decision, however, will remain highly fact specific and to mitigate potential liability boards should continue to seek professional advice. In addition, as the proposed measures are universal and do not distinguish between businesses that were struggling prior to the COVID-19 crisis and those whose financial performance has been affected only by the pandemic, it is likely that the suspension of wrongful trading rules will enable so called unviable "zombie companies" to continue to limp on fuelled by low interest debt.

Moratorium

The Business Secretary also announced a moratorium for businesses which need to undergo a financial rescue or restructuring process which would allow them to keep trading for an extended period free from creditor action. Currently only small businesses (with 50 or less employees, turnover less than £10.1 million and less than £5.1 million balance sheet assets) can seek a moratorium when proposing a Company Voluntary Arrangement (CVA) and no such moratorium is available for businesses seeking a Scheme of Arrangement with their creditors. The introduction of additional moratoria for businesses implementing turnarounds through restructurings has been mooted for some time and was considered in the Government Consultation on Insolvency and Corporate Governance in 2018.

We await the Government's legislation for clarity on the exact scenarios in which businesses will be eligible to benefit from the proposals and the length of time the moratorium will be imposed. However, we would expect this to be similar to those currently granted to companies in administration or proposing a CVA, and as a minimum, prevent creditors from independently taking action to place companies in to liquidation or administration while the financial rescue or restructuring is ongoing.

We are also expecting, following the announcement by the Business Secretary, that provisions will be introduced to ensure businesses are still able to gain access to essential supplies. The extent of these provisions is unclear however we anticipate that they may expand the existing essential supplier regime set out in the Insolvency Act 1986 under which essential suppliers, such as utility and IT suppliers are prohibited from relying on an insolvency event as a trigger to terminate the provision of ongoing supply.

Further Comment

The Business Secretary has reiterated that "all of the other checks and balances that help directors fulfil their duties properly will remain in force". While a temporary suspension on wrongful trading has been welcomed by both the British Chamber of Commerce and the Confederation of British Industry, the risk of personal liability to directors remains. In particular, directors must continue to act in accordance with their duties, both fiduciary and those codified in the Companies Act 2006. Those that do not, still face the risk of sanction and possible disqualification as a result of any misconduct.

Existing insolvency legislation, such as the rules around preferences and transactions at undervalue, remain. RPC restructuring and insolvency Partner Finella Fogarty commented: "The proposed changes may be welcomed but do they really change anything? Very few directors are actually found guilty of wrongful trading and it may bring a false sense of security. In light of the majority of the existing legislation remaining unchanged, directors will continue to need to consider and document very carefully decisions relating to creditor payments and asset disposals where there is a risk of the company entering insolvency and to seek relevant professional support to mitigate their risks in these areas."

If you would like some advice on this topic, please contact any member of our team:

Finella Fogarty
Paul Bagon
Tim Moynihan
Danielle Bennett
James Whelan
Vanessa Beazley

Restructuring and Insolvency roundup January 2018

Fri, 05 Jan 2018 16:08:58 Z

BBH Property 1 Ltd & 12 Others [2017] EWHC 2584 (Ch)
Crowdfunding: rewards, risks and regulation

Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP [2017] EWCA Civ 1872
Does ATE insurance without an anti-avoidance clause constitute adequate security for costs?

Leeds v Lemos [2017] EWHC 1825 (Ch)
Can a trustee in bankruptcy deploy privileged documents in proceeds against the bankrupt's wishes?

BW Estates Ltd: Randhawa and anor v Turpin and anor [2017] EWCA Civ 1201
Duomatic and the Dissolved Corporate Member

To find out more, download the full roundup.

Restructuring and insolvency roundup, July 2017

Tue, 18 Jul 2017 15:04:18 +0100

Two of the judgments concern the appointment of administrators, including a rare Court of Appeal decision which clarifies several elements of the appointment process and will affect director/company appointors, interested creditors and insolvency practitioners alike.

“Gagging orders”: an office holder’s secret weapon

Mon, 13 Mar 2017 14:56:01 Z

In their usual form court orders under these sections can require, respectively, directors and other parties to answer very searching questions and produce documents relevant to the business and affairs of the insolvent company beyond anything a party to litigation would be required to disclose.

Make insolvency great again

Wed, 08 Feb 2017 15:27:18 Z

In truth Donald Trump utilised various provisions of Chapter 11 of the US Bankruptcy Code to restructure his businesses. In an effort to encourage a similar level of entrepreneurial spirit, a mere 14 days after his election the EU Commission unveiled plans to adopt a pan-European regime which closely mirrors much of the US’s Chapter 11.

Restructuring and insolvency December 2015

Fri, 18 Dec 2015 14:12:00 Z

The start of October 2015 brought about important changes in insolvency law, affecting both creditors and debtors alike. The most notable changes are detailed below.

Legislative changes in effect today: what IPs need to know

Tue, 26 May 2015 14:26:00 +0100

Until now, directors’ duties under the Companies Act 2006 (CA 06) have only applied to shadow directors “where, and to the extent that, the corresponding common law rules or equitable principles so apply” (section 170(5) CA 06). What this means in practice has not always been clear, so SBEEA has replaced this section 170(5) CA 06 and stated that general directors’ duties apply to shadow directors where and to the extent that they are capable of applying.