Measures which deal with insolvency as a result of financial hardship arising from consequences of Covid-19 have been introduced by the UK and Scottish governments. A temporary change to the part of the law relating to personal bankruptcy has been brought forward by the Scottish Government. This follows on from the announcement of the UK Government’s measures to protect companies which have been affected by COVID-19.
In this insight note, we discuss and summarise the most recent measures introduced in the area of insolvency.
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Protection for companies hit by COVID-19
The UK Government’s Business Secretary Alok Sharma recently announced a change to legislation to enable UK companies undergoing restructuring to continue trading. It was confirmed that this will include enabling companies to continue buying supplies such as energy, raw materials and broadband during the rescue process.
In addition, there was confirmation that there will be provision to ensure that companies required by law to hold AGMs (public limited companies and companies required to do so by their articles) can do so safely, consistent with social distancing requirements. Such measures are said to include conducting them online or postponement. This follows a previous announcement which allows companies an automatic three-month extension on filing of accounts (on application). As at 28 March 2020, over 10,000 businesses had already successfully applied for that extension.
Moratoriums on diligence – Coronavirus (Scotland) Act 2020
The changes are summarised in the table below.
Current moratoriums on diligence
Temporary extension of moratoriums on diligence introduced by Coronavirus (Scotland) Act
A notice of intention to make debtor application may not be made if such a notice has been given in the immediately preceding 12 months.
The 12-month limit has been removed.
The ordinary period after which the moratorium on diligence ends is 6 weeks.
The moratorium period relating to debtor applications, debt payment programmes and trust deeds ends after 6 weeks.
These are extended to 6 months.
The moratorium period in circumstances whereby the protected trust deed status is not granted ends 13 weeks after the moratorium began.
This is amended to 7 weeks after the day on which the moratorium would have ended but for these provisions.
UK Government changes – Corporate Insolvency and Governance Act 2020
The new Corporate Insolvency and Governance Act 2020 brought some radical changes to insolvency law as well as amending certain aspects of corporate governance. A raft of changes to protect businesses introduced back in May 2020 have now been extended, as at 30 September 2020, to relieve pressure on businesses dealing with coronavirus. The temporary measures include:
- Companies and other qualifying bodies with obligations to hold AGMs will continue to have the flexibility to hold these meetings virtually until 30 December 2020 which means that shareholders can continue to examine company papers and vote on important issues remotely;
- Statutory demands and winding-up petitions will continue to be restricted until 31 December 2020 to protect companies from aggressive creditor enforcement action as a result of coronavirus-related debts;
- Termination clauses are still prohibited, stopping suppliers from ceasing their supply or asking for additional payments whilst a company is going through a rescue process, however, small suppliers will remain exempt from the obligation to supply until 30 March 2021 so that they can to protect their business, if necessary; and
- The modifications to the new moratorium procedure, which relax the entry requirements to it, will also be extended until 30 March 2021. A company may enter into a moratorium if they have been subject to an insolvency procedure in the previous 12 months. Measures will also ease access for companies subject to a winding up petition. The temporary moratorium rules will also be extended to 30 March 2021.
Interestingly, the fundamental change to wrongful trading rules which introduced an assumption that a director is not responsible for any worsening of the financial position of the company or its creditors has not been extended.
We will continue to monitor the Act’s progress, including any amendments and extensions.
Further changes to the 2016 Act – Coronavirus (Scotland) (No.2) Act 2020
Complementing the amendments to the Bankruptcy (Scotland) Act 2016 that were introduced by the Coronavirus (Scotland) Act 2020, and with a view to addressing the continuing economic hardship caused by the coronavirus pandemic, the Coronavirus (Scotland) (No.2) Act 2020, which came into force on 27 May 2020, proposes further temporary changes to the 2016 Act. The changes are summarised in the table below.
|Debt ceiling for Minimal Asset Procedure (MAP) bankruptcy applications: £17,000.||Increased to £25,000.|
Student loans including for debt ceiling calculation for MAP applications.
|Student loans exempt.|
|MAP application fees for those whose sole income is not derived from benefits: £90.|
Reduced to £50.
|Application fee for full bankruptcy applications: £200.||Reduced to £150.|
Minimum debt threshold for creditor petition: £3,000.
|Increased to £10,000.|
There are also general administrative changes introduced to expedite the insolvency process as follows:
- creditors are permitted to have virtual meetings;
- all statutory forms can be completed with electronic signatures;
- bankruptcy circulars can be sent electronically with the consent of the recipient; and
- inhibitions and inhibition renewals can be submitted electronically to Registers of Scotland.
Arguably, the most fundamental amendment is the increase of the threshold for creditor petitions from £3,000 to £10,000. Clearly, this makes it significantly more difficult for creditors to access what is often the last-ditch attempt at diligence.
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