May 20, 2020

UK Government Publishes UK Restructuring and Insolvency Law Reforms


On May 20, 2020, the UK Government published its much anticipated draft legislation (the Corporate Governance and Insolvency Bill) which aims to provide greater opportunities for company survival and better returns for creditors during and after the COVID-19 emergency. The Government intends to ask Parliament to expedite progress of the Bill.

If enacted in its current form, the Bill will introduce greater flexibility into the UK’s insolvency regime, allowing companies breathing space to explore options for rescue while supplies are protected, so that they have the maximum chance of survival. It will also temporarily suspend parts of insolvency law to support directors to continue trading through the COVID-19 pandemic without the threat of personal liability, and to protect companies from aggressive creditor action.

Key reforms include:

  • A free standing moratorium of an initial 20 business days (extendable in certain circumstances) for struggling businesses which are unable to pay their debts or likely to become unable to do so, but which are capable of being rescued. The directors will remain in charge of the business (so this is a “debtor-in-possession”-type process), overseen by an independent monitor. The moratorium is broad and will prohibit, among other things, legal proceedings and the enforcement of security (subject to exemptions including financial collateral arrangements).
  • Contractual termination clauses (and clauses which allow for other things such as changes to payment terms) will cease to have effect where a company enters an insolvency or restructuring procedure. There will be exemptions for certain companies (predominantly in the financial services sector) and contract types (such as set-off and netting arrangements), which are helpful but will require careful interpretation. There will also be safeguards for suppliers.
  • A new restructuring plan modelled on the existing scheme of arrangement but which includes the ability of the courts to bind classes of creditors who vote against it (cross-class cram-down) where the restructuring plan is fair, equitable and in the interests of creditors.
  • A temporary modification to the rules on director liability for wrongful trading. When determining liability for wrongful trading (in any subsequent administration/liquidation), the court will assume that the director was not responsible for losses incurred while the company was suffering from the impact of the pandemic. However, directors’ will continue to owe duties during such periods and the Bill when enacted will not prevent liquidators/administrators for bringing claims against them for breach of duty.
  • A temporary prohibition on the service of statutory demands and making of winding up orders. Statutory demands against companies between 1 March 2020 and 30 June 2020 cannot be used as the basis of a winding up petition. Any creditor asking the court to make a winding-up order must show that the company’s inability to pay its debts was not caused by COVID-19.

See related posts:

Winding-Up Petitions – COVID-19 Temporary Restrictions Introduced by the Corporate Insolvency and Governance Bill 2020

Wrongful Trading – Temporary COVID-19 Changes Introduced by the Corporate Insolvency & Governance Bill


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