Coronavirus Insolvency Update

  • Insight

27 May 2020

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.
 
For further updates and information from our Business Hub, you can subscribe here.

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 Coronavirus (Scotland) Act 2020 which came into force on 7 April 2020 includes proposed changes to the Bankruptcy (Scotland) Act 2016 relating to moratoriums on diligence.

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 Bill

The new Corporate Insolvency and Governance Bill has now (20 May 2020) been introduced to Parliament and, if made law, will indeed bring some radical changes to insolvency law as well as amending certain aspects of corporate governance. These include:

  • A fundamental change to Wrongful Trading rules, with the introduction of an assumption that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the period 1 March 2020 to 30 June 2020, or one month after the coming into force of the act whichever is the later.
  • Restrictions on a supplier’s ability to terminate contracts on insolvency (with certain in-built protections for suppliers). 
  • A new Moratorium for companies, providing protection from creditors while directors consider a rescue plan.  Control of the company remains with the directors of the company, but subject to certain restrictions and oversight by an Insolvency Practitioner.
  • The restriction on statutory demands made between 1st March 2020 and 30th June 2020 forming the basis of a winding up petition.  Additionally, the prevention of winding up petitions for the period 27th April 2020 to 30th June 2020 in respect of all other grounds unless “the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company, or the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.”
  • Flexibility introduced on certain corporate governance matters, including meetings and statutory filing requirements.

We will continue to monitor the Bill’s progress, including any amendments, towards becoming law.

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.

Current provisions

Temporary changes

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.

We’re here to help 

We want to help during these unprecedented times.  Our business teams are keeping in touch with clients and we’re taking initial calls on a pro-bono basis, to talk to you about your concerns and business needs.

For further information on insolvency matters, please contact Katrina Lumsdaine or Laura McCabe.

Legal disclaimer

For more information on this topic, contact