On 28 March 2020, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) announced key measures to protect companies and businesses facing major funding and operational difficulties in the current COVID-19 pandemic. The measures will involve the Government bringing forward legislation at the earliest opportunity to amend current U.K. insolvency law to give firms extra time and space to weather the current storm while ensuring that creditors can get the best return possible in the circumstances. These measures will likely have a significant impact on the position of creditors and their existing rights to seek repayment of overdue indebtedness, etc.
The Government also intends to put measures in place to assist companies with the holding (or postponing) of AGMs while the current restrictions on public gatherings remain in place.
The legislation will be introduced to implement these measures at the earliest opportunity. Until then, there is bound to be a degree of speculation as to what exactly the changes will involve.
The Government has so far provided very little detail in its announcement about these new measures, beyond saying that:
The Government has also said that the new legislation to introduce these measures will implement the plans that were announced in August 2018 to introduce certain new insolvency restructuring procedures (the “2018 Insolvency Proposals.”)
The Government announcement follows various discussions that have been ongoing between business bodies, professional advisers, others and the Government about the sorts of protections and help in the area of insolvency law that are most urgently needed by U.K. businesses. As part of these, last week the Insolvency Committee of the City of London Law Society (the “CLLS”) produced some specific proposals of its own but it is not clear to what extent (beyond the temporary suspension of wrongful trading) these will provide the basis for the new measures just announced. In case these become relevant, however, a summary of the CLLS proposals is provided in the Annex to this briefing.
In addition, the Government will have been aware of the measures that several other jurisdictions, including Australia, Germany and Spain for example, have already announced or introduced, providing for the temporary suspension of, or restrictions on, creditor led insolvency proceedings as well as for suspension of wrongful trading type liability.
A new moratorium is to be introduced to protect companies while they explore options for a financial rescue or restructuring. This will be in addition to the existing moratoria provided by the Insolvency Act 1986 (the “Act”) to companies that either enter into administration or, albeit only for a ten-day period, file notice of their intention to appoint an administrator. We will have to wait for the publication of draft legislation to see to what extent this new COVID-19 moratorium will differ from, or build on, the new moratorium detailed in the 2018 Insolvency Proposals (summarised below).
Section 214 of the Act allows a liquidator or administrator to apply to the court for an order requiring a director to make a financial contribution to the assets of the company where a company has gone into insolvent liquidation and before the winding up the director knew or ought to have known that there was no reasonable prospect that the company would avoid entering into insolvency.
The Government has announced that these provisions will be suspended, retrospectively from 1 March 2020. Despite this suspension, directors will remain subject to several other potential sources of liability (including criminal liability) under the Act, including, for example, personal liability in respect of fraudulent trading.
The insolvency reforms that the Government announced in August 2018 (and has now said it intends to introduce with its new COVID-19 measures) were set out (though without any draft legislation) in Section 5 of an Insolvency and Corporate Governance—Government response document. These proposals followed on from its 2016 consultation on reforms to the U.K. corporate insolvency regime and included:
The new moratorium announced in August 2018, would include these features:
This new restructuring plan would operate independently of any use that might be made of the above moratorium facility and involve a two-stage court process similar to the existing process for schemes of arrangement under the Companies Act 2006. This does not seem to fall into the class of “emergency help” that companies currently need and may seem to be a surprising and likely complex initiative to be prioritising at this time. However, it may be that the Government wants to provide some certainty now about the future options that may be available to companies once they have the protection of the short-term moratoria which is to be put in place and can start to plan for a restructuring that will assist them in the months and years ahead once the present crisis has abated.
The key features of this new restructuring plan are:
The Government has said that it will attempt to strike a balance when introducing these COVID-19 insolvency changes between protecting companies from short-term liquidity challenges and ensuring that creditors get the best return possible in those circumstances. Perhaps inevitably, that balance is likely to favour debtor companies more than creditors and that is bound to be of concern to creditors whose businesses may also be threatened with COVID-19 related liquidity and operational pressures, particularly as a consequence of their debtors seeking relief under these new moratoria provisions.
Once details of the Government’s new measures are available, we will have to see to what extent creditors’ existing rights to apply to the court for the appointment of an administrator or to present a winding-up petition (perhaps subject to the court being satisfied that there is no realistic prospect of a company avoiding insolvency) remain available.
A major problem for public and listed companies facing holding their AGMs in the next few months is how they will manage to do that while the COVID-19 restrictions on movement and gatherings remain in place. Although these companies have been granted recent concessions:
none of these concessions relieve those companies from the requirement under section 336 of the Companies Act 2006 to hold an AGM within six months of the end of their financial year.
A number of concerns have been expressed about how this AGM problem could best be resolved for companies, all of which, hopefully, will now be removed and addressed by the following measures that the Government has announced it will legislate for, so as to enable AGMs:
These concerns ranged from possible legal issues surrounding holding totally “virtual” meetings, as opposed to “hybrid” meetings where some form of physical meeting still takes place and whether a company’s articles would permit this, to investor concern about wholly virtual meetings. Also, whether companies might be forced to hold their AGMs before their accounts would be available to be laid before the AGM and the impact that might have on the authorities (with regards to share allotment, disapplication of pre-emption rights, share buybacks and director re-election) which companies typically ask shareholders to renew on an annual basis at their AGMs.
Finally, on 27 March 2020 ICSA | The Chartered Governance Institute, with the help of various other organisations and firms, published Q&A guidance for companies on holding AGMs while the current restrictions on public gatherings remain in force. This supplements earlier guidance published on 17 March 2020 and will be of help to any company planning to hold a meeting during the current environment, before the Government's new AGM measures are introduced.
Summary of certain of the CLLS “Proposals for Mitigating the Short Term Effects on Viable Businesses of COVID-19”
Directors may, temporarily, be permitted to file a special “COVID-19 Declaration” (a “Declaration”) stating that the company is facing liquidity or operational challenges as a result of circumstances related to COVID-19. The effect of this would be:
A new moratorium could be made available, in addition to the existing moratoria provided under the Act in connection with administrations. The features of this might include:
 See the BEIS announcement of these emergency measures
 See paragraph 44, Schedule B1, Insolvency Act 1986
 See the Insolvency and Corporate Governance - Government response 26 August 2018
 See A Review of the Corporate Insolvency Framework 2016
 See the Companies House three month extension for filing annual accounts
 See the FCA statement on the two month extension to publishing annual financial reports
 See the LSE's three month extension for AIM companies to publish their annual financial reports
 See the recent open letter from ShareAction to BEIS about the need for any flexibility for AGMs to be held on an entirely “virtual” basis to be strictly time-limited to the duration of the present COVID-19 crisis
 See the ICSA | Chartered Governance Institute supplementary AGM guidance note
 See the earlier ICSA | Chartered Governance Institute AGM guidance