UK extends suspension of wrongful trading liability to June 30
In an effort to help businesses affected by the coronavirus (Covid-19) pandemic, the UK’s FCA announced today that there will be a financial services exemptions in the forthcoming Corporate Insolvency and Governance Bill.
The Bill is sponsored by the UK’s Department for Business, Energy and Industrial Strategy and is due to be begin passage through Parliament shortly.
The FCA stated that on 28 March 2020, Business Secretary Alok Sharma announced new insolvency and corporate governance measures to help businesses affected by the coronavirus (Covid-19) pandemic. These measures are expected to be included in the aforementioned Corporate Insolvency and Governance Bill (Bill).
The regulator stated that it is necessary to have specific provisions in the Bill for the financial services sector in order to protect consumers and financial stability. These provisions will help to ensure that the UK’s existing special insolvency regimes for financial sector firms remain effective, and that financial market participants have the legal certainty so that financial markets function effectively.
Specifically, the Bill provides the following measures:
Company moratorium: The Bill proposes to create a moratorium during which no legal action can be taken or continued against a company without leave of the court.
Suspension of Ipso Facto (Termination) clauses: When a company enters an insolvency or restructuring procedure, suppliers will often either stop or threaten to stop supplying the company. The supply contract often gives them the right to do this, but it can jeopardise attempts to rescue the business. The proposed Bill will mean suppliers will not be able to jeopardise a rescue in this way. The proposals include safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business.
Temporary suspension of wrongful trading provisions from 1 March 2020 for 3 months: The Bill proposes to temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the coronavirus pandemic with the uncertainty that the company may not be able to avoid insolvency in the future. Liquidators and administrators will not be able to take an action against an insolvent company’s directors for any losses to creditors resulting from continued trading while the wrongful trading rules are suspended. This will remove the pressure on directors to close otherwise viable businesses to avoid potential liability.
These measures will not be available for some financial services firms and contracts. The list of exclusions from the measures is expected to include banks, investment firms, insurers, payments and e-money institutions and certain market infrastructure bodies. Firms that safeguard client assets are also expected to be excluded from the company moratorium during the coronavirus period and temporary suspension of wrongful trading provisions.
In addition, the Bill proposes to provide a new Restructuring Plan which is expected to be available to financial services firms, through the appropriate safeguards including a role for the FCA and PRA.
Finally, the Bill proposes to contain other insolvency and corporate governance changes where no specific exclusions for the financial services sector are expected. These include:
Temporary suspension of Statutory Demands and Winding up Petitions (2 measures)
The Bill proposes to help struggling businesses by temporarily removing the threat of winding-up proceedings where unpaid debt is due to coronavirus. It introduces temporary provisions to void statutory demands issued against companies during the emergency. This gives businesses the opportunity to reach realistic and fair agreements with all creditors.
Temporary flexibility of Annual General Meetings (AGMs)
AGMs (and general meetings) are central to good corporate governance, but having hundreds of individuals in a room is not permitted under the statutory restrictions on public gatherings, so many companies cannot hold their AGMs in accordance with their constitutions. The Bill proposes to temporarily allow those companies that are under a legal duty to hold an AGM or general meeting to hold a meeting by other means even if their constitution would not normally allow it. More information about the new AGM measures(link is external).
Temporary flexibility of Filing Requirements
Companies are required to make a number of different filings by fixed deadlines at Companies House each year. Missing the deadline automatically results in a financial penalty. Companies House has already done all it can under existing law to offer extensions to those deadlines. Over 50,000 companies have taken advantage of this flexibility already, but they may need more. The Bill proposes to allow the Secretary of State temporarily to make further extensions, enabling struggling businesses to focus on the things that matter most while they have reduced resources and restrictions.
Some of the proposed measures are expected to apply retrospectively. For example, the temporary ban on the use of statutory demands is expected to apply from 1 March (until 30 June) and the temporary ban on the use of winding up petitions is expected to apply to petitions made from 27 April (until 30 June).