Last Updated: 29th May
The impact of the Coronavirus outbreak has been felt acutely in the hospitality and leisure sectors with outlets being the first to be closed and looking likely to be the last to reopen. Many businesses will have had no income since 20 March. The impact is being felt both in terms of the likelihood of businesses heading into insolvency, and the effects on the insolvency process itself. These FAQs aim to answer some of the common questions being asked in this area.
Q. 1. My company has received a winding up petition. Are hearings still going ahead? What should I be doing?
A. 1. Winding up and bankruptcy petitions due for a hearing are still taking place, albeit remotely by telephone or Skype for Business in accordance with the Protocol for Remote Hearings and the “Review of Court Arrangements due to COVID-19” guidance. However, the Government’s newly announced Corporate Insolvency and Governance Bill which is currently making its way through Parliament contains provisions restricting the presentation of debt-related winding-up petitions in the period from 27 April 2020 to 30 June 2020 or one month after the Bill comes into force, if later. These include a blanket restriction on petitions based on statutory demands and conditional restrictions on petitions based on a company’s inability to pay its debts. For further information on the Debt Collection and Winding up Petition Restrictions will follow shortly. In the meantime you should be seeking legal advice on the winding up petition received so that you can explore the options available to you / your company.
Q. 2. I am a creditor of an individual / company. Can I take action to recover the monies I am owed despite the coronavirus outbreak?
A. 2. Yes, you should be seeking legal advice on the options available to you (if any) to recover the monies owed. You should establish whether you have a claim against the debtor as soon as possible, as prompt action can often increase the chances of recovery of the monies. It might be that a solution can be reached without the involvement of the Courts, or at least ensure that this only becomes necessary at a later date. Legal advice is particularly recommended in view of the Government’s newly announced Corporate Insolvency and Governance Bill which is currently making its way through Parliament and contains provisions restricting the presentation of debt-related winding-up petitions. For further information on the Debt Collection and Winding up Petition Restrictions will follow shortly. It should however be noted that the Corporate Insolvency and Governance Bill does not contain similar proposals for individuals in the context of bankruptcy.
Q. 3. I am a creditor of a company. Can I still serve a statutory demand on the debtor company?
A. 3. Yes, you can still serve a statutory demand on a debtor however the Government’s newly announced Corporate Insolvency and Governance Bill is proposing a blanket restriction on presenting winding-up petitions to court on or after 27 April 2020 where they rely on a preceding statutory demand served during the relevant period (1 March 2020 to 30 June 2020 or one month after the Bill comes into force, if later). So if you are planning to then rely on the debtor’s failure to pay the statutory demand and present a winding-up petition accordingly, it might not be the best time to do so. Legal advice should therefore be sought to explore any alternatives available to you / your company to recover any debts due.
Q. 4. I am a director of a company and have read about the suspension of the ‘wrongful trading’ provisions. Are there any other ways in which I could still risk personal liability as a director?
A. 4. Yes; existing laws for fraudulent trading, misfeasance and reviewable transactions are still in force. Similarly the director disqualification rules still apply. It should also be noted that the Government’s newly announced Corporate Insolvency and Governance Bill does not seek to amend the wrongful trading provisions of the Insolvency Act 1986 directly but sits in parallel to them. For further information in this regard we would suggest reading the article we have prepared. We would also strongly recommend that you seek legal advice on your position as a director if you are concerned about your company’s financial position.
Q. 5. I am a director of a company and my company has entered into financial troubles since the Coronavirus outbreak. How do I know if my company is insolvent and is there any way I can avoid this?
A. 5. Directors who are concerned about their company’s ability to meet its current and future financial commitments following the Coronavirus outbreak should seek independent advice as soon as possible to avoid potential personal liability under insolvency legislation. The potential risks for a director in such circumstances are complex and include the risk of being disqualified from holding the position of director or being involved in the promotion or management of a company for a period of up to 15 years.
Two tests are used to establish insolvency: the cash-flow test looks at whether a company is unable to pay its debts as they fall due, whilst the balance-sheet test focuses on whether the company’s liabilities outweigh its assets. Applying the tests is not always a straightforward process. However, once the criteria are met, the company risks being placed into administration or wound up. The Government’s newly announced Corporate Insolvency and Governance Bill which is currently making its way through Parliament contains provisions which largely suspend the potential for wrongful trading liability to be incurred between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is later). However such legislation is not yet in effect.
Q. 6. What is the government doing to help struggling business during the Coronavirus outbreak?
A. 6. On 26 March 2020 the Government published the 117th Practice Direction to stay possession proceedings for a period of 90 days, commencing on 27 March 2020. This applies to both residential and non-residential possession proceedings and includes mortgage possession proceedings.
The Government’s newly announced Corporate Insolvency and Governance Bill which is currently making its way through Parliament also provides for changes in three main areas to give companies breathing space and keep trading while they explore options for rescue:
(i) corporate insolvency reform, comprising a new statutory moratorium process for debtor companies, a new restructuring plan procedure and provisions invalidating contractual provisions in contracts for the supply of goods and services, triggered by insolvency proceedings changes;
(ii) corporate governance provisions, which include a number of measures to provide companies and other qualifying bodies with temporary easements on certain company filing obligations and requirements relating to AGMs and other meetings; and
(iii) measures to protect directors and their companies from creditor action on debts due to the COVID-19 pandemic, comprising provisions mitigating director liability for wrongful trading during the pandemic, and provisions restricting the presentation of winding-up petitions for a four-month period to recover debt.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.