Legal view by David Mohyuddin QC
The Government is asking for power to make temporary amendments to modify the impact of corporate insolvency provisions.
It says that that power “will provide a means for specific and temporary changes to be made to corporate insolvency and governance legislation should the urgent need arise to do so, which will allow quick reactions to any unforeseen challenges arising as a result of the pandemic’s impact on business”.
Regulations conferring this power were laid before Parliament in February, reasonably well ahead of the expiry of the current relaxations of and modifications to corporate insolvency legislation on April 30.
However, directors should be cautious about relying on such an extension – or the introduction of new moderations to corporate insolvency law.
Instead, they should be considering now what the effect on their company’s business will be when the present arrangements – including whatever support is available from Government – come to an end.
If they know – or should know – that their company is insolvent or that it is probable that their company will become insolvent, then they owe a duty to put creditors’ interests first.
And they should act soon in any appropriate attempt to rescue the company’s business and avoid entry into an insolvency regime.
There are three tiers of action directors might consider. The first involves “live-side” changes to support their company. The second involves entry into a more formal arrangement, including the Court where needed, but falling short of a formal insolvency process.
The third involves entry into an insolvency process which is probably the end for the company.
If they are considering embarking upon any of them, directors will benefit from specialist advice. Warts-and-all instructions should be given to the advisors, who can then advise in the light of the company’s true position.
Directors who seek advice ought to record the instructions given to the advisors, the advice received from the advisors and the steps taken following that advice.
In the first category are steps including:
- Restructuring borrowing. Lenders can be approached with requests to relax covenants. Other lenders might offer better terms, although directors ought to be cautious about taking further borrowing where there is a risk of default in repayment of existing and new facilities. Personal liability might attach to directors who borrow more when they know or should know that repayment will never be made.
- Improving cash levels by ensuring that debtors pay on time and the company takes full advantage of payment terms offered by suppliers. They, and other creditors, might agree to extend payment terms. But, if agreed terms are exceeded, creditors might well start court proceedings or – subject to the current restrictions – present a winding up petition.
- Entering into time to pay agreements with the Revenue. This generally implies commercial insolvency, however; the debt is due but cannot be paid on time. Note also that all other payments to the Crown must be made when they are due.
- Engaging with stakeholders and seeking their support. Those who might be interested in the company’s survival are its trading counterparties (who themselves might well be under financial pressure) and investors.
But in a smaller company, the directors themselves are likely to be the shareholders; they will need to decide whether they want to put their hands in their own pockets.
Taking advantage of support options available from the Government, for as long as they remain available.
In the next tier are more formal, director-led arrangements which could be very helpful:
- A restructuring plan under Part 26A of the Companies Act 2006, a process proposed back in 2018 and given effect by Corporate Insolvency and Governance Act 2020 (CIGA). The company must be facing financial difficulty and the plan must be aimed at resolving that difficulty.
If certain conditions are met, the court has the power to sanction the plan despite the objection of a class of creditor (the so-called cross-class cram down). If there has been an earlier moratorium, some creditors might have an effective veto.
- A moratorium, as introduced by CIGA. This is an arrangement supervised by a “monitor” who must consider it is possible to rescue the company and remain of that view. It leaves the directors in control and gives the company an initial 20 days’ breathing space. The period can be extended by a further 20 days and up to one year.
In this scenario, rather than admitting to financial difficulties, it has to be accepted that the company is or probably will become insolvent.
- The well-known, but sometimes controversial, company voluntary arrangement. The company proposes a compromise with creditors. If they approve, creditors are bound by the terms of the CVA and cannot take their own independent action against the company.
CVAs last months or years and the Company has to comply throughout with the obligations imposed on it; this can be an impediment on agility in circumstances where, say, the company’s fortunes have revived.
Facing the reality of adverse financial circumstances is unpleasant for any director and attempts at rescue are likely to be stressful. But, with the right advice, it is possible to find a route to recovery and avoid terminal insolvency.
David Mohyuddin QC is a barrister at Radcliffe Chambers