Beware the Elephant Traps

Something I have been asked several times recently is when should directors seek advice from an insolvency practitioner.  My answer is always “as soon as possible” as there are more options available the earlier advice is sought, with the likelihood of rescue and recovery markedly higher.

The other advantage is that a director is less likely to step on what I call the elephant traps.  These antecedent transactions, explained below, can lead to personal liability for the director to restore the position to what it would have been prior to the transaction taking place.

  1. Preference

The Insolvency Act 1986 defines a preference as where a payment is made to a person and “that person is one of the creditors or guarantor for any of the debts and [the insolvent] does anything which has the effect of putting that person into a position which will be better than if that thing had not been done”. 

It needs to be proved that the company was insolvent at the time (or as a result) of the transaction and that there was a desire to prefer the creditor or guarantor.  However, where the recipient of the preference is a party connected with the company (e.g. a director or relative of a director or a company of such a person) then the desire is presumed.  Finally, the payment needs to take place within a relevant time which is 6 months prior to the company entering liquidation or administration, although this is extended to two years when the recipient is connected.

Typically, preference payments involve payments being made to directors to clear loan accounts, to creditors personally guaranteed by the director or to suppliers which the director intends to utilise should they start a new business.

  1. Transactions at an Undervalue

A transaction at undervalue occurs when a company “makes a gift or otherwise enters into a transaction that provide for no consideration” or “enters into a transaction for a consideration the value of which is significantly less than the value provided” in the two years prior to the company entering liquidation or administration.  Additionally, it needs to be proved that the company was insolvent at the time (or as a result) of the transaction.

The most common examples are the gifting of assets to directors or the transfer of an asset the director believes is theirs (e.g. a company car) for a value far less than it was worth.

  1. Transactions Defrauding Creditors

A transaction defrauding creditors arises when a company “makes a gift or otherwise enters into a transaction that provide for no consideration” or “enters into a transaction for a consideration the value of which is significantly less than the value provided”.

On the face of it, that sounds exactly like a transaction at undervalue but in this case it needs to be proved there was an intent to put assets beyond the reach of anyone likely to make a claim (typically a creditor).  There is no need to prove insolvency and the transaction does not need to occur in a relevant time period.

Often these cases involve scenarios where financial arrangements are changed to ensure one party holds the assets while another takes all the risk.

  1. Wrongful Trading

Wrongful trading occurs where “at some time before the commencement of the winding up, [a director] knew or ought to have concluded that there was no prospect of avoiding insolvent liquidation”.  

Case law has held that a director can be held personally liable for the increase in liabilities from the point where they ought to have reached the conclusion to the time when the company ultimately enters liquidation or administration.  A statutory defence is available to directors where “they took every step with a view to minimising the loss to the company’s creditors”. 

An example would be directors acknowledge their company had suffered losses and there was insufficient capital to keep the company trading.  Over the next two years (say) debts increased by £200,000 and the company went into liquidation owing £350,000.  The wrongful trading (and personal liability) is the £200,000 increase.

  1. Fraudulent Trading

Fraudulent trading carries criminal sanctions as well as personal liability for any party “knowingly … carrying on business with intent to defraud creditors or for any fraudulent purpose”.  The company does not need to be insolvent at the time of the fraudulent trading, which could be as simple as a single act.

A single act could be the taking of a loan, using the funds for personal benefit and having no intention of repaying the loan.  This would include the government backed Covid support schemes.

  1. Misfeasance

Misfeasance occurs where a director breaches their duty (fiduciary or otherwise) in relation to the company.  Common examples of this include adopting a systematic policy of avoiding paying taxes to HM Revenue & Customs, failing to maintain adequate books and records and paying dividends where there were not the available reserves to do so.

It is a common policy for director/shareholders to pay themselves a mixture of salary and dividends to reduce the tax liability but recent court judgements have held that dividends cannot subsequently be converted to salary if challenged.

Except with the statutory defence outlined above for wrongful trading, the antecedent transactions outlined have no defence so if a director steps on the elephant trap there is mitigation.  As a result, I must return to what I said at the outset that if advice is not taken as soon as possible, then this position could result in significant sums becoming payable by the director.

Government extends business support measures.

The Government have announced two further extensions of provisions under the Corporate Insolvency & Governance Act 2020.

 

Commercial landlords

The ability to evict or take goods in lieu of rental arrears has been further suspended until 25 March 2022.  The Government have produced a guide for landlords, which includes financial assistance.  The link is:

https://www.gov.uk/government/publications/covid-19-and-renting-guidance-for-landlords-tenants-and-local-authorities/coronavirus-covid-19-guidance-for-landlords-and-tenants

While this provision can be financially damaging to landlords, tenants also need to understand they must continue to pay rent (whether that is the contractual sum or a reduced amount under an agreement with their landlord) otherwise they are simply accruing a debt that could become unmanageable, while simultaneously increasing the landlord’s frustration, meaning they show less understanding once these provisions are lifted.

Further to the above, a director may have given a personal guarantee or, in non-payment of the rentals, could be exposing themselves to potential malpractice action (which carries personal liability) should their company ultimately fall into liquidation.

Debt enforcement

The restrictions on statutory demands and winding up petitions are being extended for a further three months until 30 September 2021.  The Government claim this is, “To protect companies from creditor enforcement action where their debts relate to the pandemic.”

It is, perhaps, interesting the announcement appears to be silent on extending the moratorium over wrongful trading, although directors, in particular, should not hold the misconception suspending wrongful trading provisions protects them if they continue trading beyond a point where creditors suffer.

While being of the view extending the above provisions further is kicking the can down the road, it is understandable.  The COVID road map has been pushed back until 19 July and with furlough to end in the autumn companies will need to re-adjust their overhead expenditure while also getting their business back on track after the adverse impact of lockdown.  Holding off aggressive creditor action to the end of September provides some breathing space for companies to recover before having to deal with aged debt.  Holding off landlords even further allows additional time for business owners to assess the viability of continued trading.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

ARE YOU PREPARED FOR ‘NORMAL’ ?

Have you heard the phrase, “You cannot change the past, but you may influence the future?  All too often we blame what has happened rather just accept that it has happened, and we need to address matters going forward.

 

The past 14 months, or so have been arguably the most challenging any of us have experienced but June brings forward two very important dates:

  • Assuming the Government road map stays on course, the 21st is expected to see the end of restrictions and a return to normal life.
  • It is widely believed the (thrice) extended deadline on various interim restrictions and amendments invoked under the Corporate Insolvency & Governance Act (“CIGA”) will end on 30 June.  These include a limitation on serving statutory demands, presenting winding up petitions and landlords taking recovery action for rental arrears.

 

In addition to the CIGA provisions, many businesses will now be receiving notification that repayments of the “Bounce Back” loans are falling due, while the employment furlough scheme is set to end in the autumn.

All the above events will serve to impact on company cash flow, while many will face recovery action from those debtors, frustrated they could not take enforcement action during the CIGA restriction period.  This includes HM Revenue & Customs where enforcement action has been limited to tax evasion and other limited taxation matters.  It is little wonder the Government have extended the restriction period.

Many will be aware of the phrase, “If you fail to plan then plan to fail.”  Unfortunately, all too often, people are great at what they do as a profession, but the accounting/bookkeeping side is seen as a necessary evil.  That may well be the view but if you had a flat tyre, would you carry on driving or stop and do that necessary evil of changing the wheel?

The prediction is UK will endure a short, but sharp economic recession.  As with previous economic challenges, those prepared are generally the ones who survive, so how do you promote the chances of you being one of those survivors?  Here are a few points that I see when assisting companies in financial difficulties:

 

  1. Put together a cash flow forecast (ask your accountant to help if preferred).  When you have this, check actual trading results with the forecast, at least on a monthly basis in order to compare projections with the actual results.

 

  1. Credit control.  Remembering cash is king and a good customer is a paying customer, and your customers are likely to be facing similar post COVID issues as you.  Unpaid debts do not pay the wages!

 

  1. With credit control comes setting and keeping to credit limits.  If you set a credit limit of (say) £5,000 for a customer and an order comes in that exceeds that limit, be bold enough to inform them you cannot entertain that latest order until some of the older invoices are paid.  Yes, some may grumble but your recovery time will improve.

 

  1. Where appropriate, consider negotiating longer debt repayment terms with creditors.  The Government anticipate there should be a lot of forbearance demonstrated by creditors (including HM Revenue & Customs) as, generally speaking and within reason, they would rather recover their debt than find they are on a list of creditors of an insolvency.

 

  1. Avoid the temptation of “Corrective trading.”  What I mean is, for example, do not think hiking your prices will help you recover sales income lost during the COVID restrictions.  While reasonable increases maybe acceptable, pushing that barrier too high will inevitably lose you custom.

 

  1. If in any doubt, seek independent and professional advice, whether that is from your accountant, solicitor, or an insolvency practitioner.  These advisors are there to assist you and steer you in the right direction so use them and use them at an early stage.

 

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Are we heading for an economic cliff?

How prepared are you for when the COVID-related financial support and other interim measures fall away? 

With the impact of COVID the Government laid down, what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”) which became law in June 2020 and had retrospective effect to March 2020.  CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA.  These restrictions were intended to expire on 30 September but were extended to 31 December and subsequently 31 March 2021.  In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions.  As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears.

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses.  This influence is made all the greater following the upgrading of HMRC to secondary preferential status when formal insolvency is required.

So, what is the good news?

Well, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands.  In addition, recognising the resulting position of HMRC and the detrimental effect COVID has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-affected corporate restructuring.  Clearly, time will tell on this recommendation and I would say this commercial understanding needs to be wider by including landlords and credit controllers who are all seeking recoveries.

I asked in the title whether we are heading towards an economic cliff.  Personally, I would suggest “Normal” (whatever that is) will not occur over night.  So, rather than a cliff as COVID restrictions ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be pro-active.  Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-COVID levels.  You should engage with your creditors and for those who are owed money, a commercial understanding is going to be the order of the day.  If all fails, the advice has to be to seek early advice.  It is no coincidence those who do seek early advice find they have more options available then those who leave it until the last minute.  As a Scout will say, “Be prepared.”

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

COMPANY VOLUNTARY ARRANGEMENTS

The Association of Business Recovery Professionals (R3) which is the trade association for the United Kingdom’s insolvency profession, has launched a standard form of proposal (Standard Form) for company voluntary arrangements (CVAs) in light of the COVID-19 pandemic and the subsequent negative economic implications on businesses, especially small and medium-sized enterprises (SMEs). This has been prepared after consultation with insolvency professionals.

BACKGROUND

A CVA is a statutory agreement between a company and its creditors. It allows the company to come to an arrangement with its creditors over payment of its debts or to pay only a proportion of the debt it owes, while continuing to trade. A company can only arrange a CVA through an insolvency practitioner and is required to show that the company is still viable as a going concern. The CVA must be approved by 75 percent (by debt value) of the creditors who vote. CVAs are legally binding on all unsecured creditors and will typically last from one to five years (although there is no legal limit). Once the CVA has been entered into, the company will need to make the scheduled payments outlined in the CVA.

KEY FEATURES OF THE STANDARD FORM

Key features of the Standard Form include:

• A delayed period before payment of 100 percent of the company’s debts (which R3 suggests should be six months). The duration of the delayed period will predominantly depend on the specific circumstances and creditors of the company, and the time periods suggested in the Standard Form should be viewed as guidelines only.
• An explicit statement that the company is experiencing financial distress due to COVID-19 and for which the company will have to provide supporting details of its circumstances.
• New trading costs incurred during the CVA are to be paid out of new trading income and support from the UK government, where available.
• An additional introductory period of a maximum of three months, designed for companies that are still unable to restart their operations following the initial UK lockdown that began on 16 March 2020.
• A moratorium against creditors enforcing their historic pre-CVA debts during the “introductory period” and the “breathing space period” of the CVA. The Standard Form also includes mechanisms to extend these periods.
• During the CVA, a number of restrictions will apply to the company’s operations, including declaring dividends, increasing directors’ salaries and borrowing or selling the company’s business or assets (save in the ordinary course of business) without the consent of the CVA supervisor (the supervisor) or creditors.
• The ability to suspend payments if the company is located in an area that is currently under a local lockdown (such as businesses forced to close if they are in Tier 3 area).
• The ability to seek further decisions if more significant changes become necessary due to COVID-19.
The main advantage of the Standard Form is the moratorium placed on creditors, which gives the company some breathing space before its creditors can enforce their debts against it. The Standard Form can also be used in conjunction with the new moratorium for businesses introduced by the Corporate Insolvency and Governance Act 2020.
It is important to note that the Standard Form is not “one size fits all.” The Standard Form is also not intended to replace professional advice. Rather, it is intended to provide a foundation, which will save time and costs and make CVAs more accessible for SMEs.

CONCLUSION

Although CVAs are a bespoke process, the Standard Form will undoubtedly aid SMEs considering the CVA process. With the number of company insolvencies set to increase in the United Kingdom over the next few months, it is likely the Standard Form will be a useful tool for SMEs to set the foundation for further negotiations with creditors.
That being said, it should be noted HMRC will fall into the definition of “secondary preferential creditors” from 1 December 2020 under the Finance Act 2020. If a company owes a large debt to HMRC, then any proposed CVA will most likely fail. Whether this leads to a decrease in CVAs after 1 December 2020, or if the UK government will intervene in light of COVID-19, remains to be seen.

Should you have an insolvency-related issue then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

What superpower would you have if you could?

What superpower would you have if you could?  Invisibility? Being able to fly? Teleportation?  Or how about being able to re-write the law to suit yourself and ensure you are always on the right side?  That’s exactly what the government has done with two measures in the Finance Act 2020.

 

The first is the position where HM Revenue & Customs rank for dividend purposes.  For insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  This includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  “Secondary preferential” means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.  To summarise, HMRC have therefore jumped to pretty much the top of the priority order in one fell swoop.

 

As a direct result of this, The Association of Business Recovery Professionals estimate that future new lending by banks will be £1 billion less, making recovery and turnaround harder.  To make things worse, the ability to use a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option as.  the unpaid taxes rank ahead of the general body of creditors, reducing the amount available to unsecured creditors.  Furthermore, it is likely there will be a significant HMRC debt as generally HMRC are the first creditor businesses and individuals stop paying – indeed this is one of the Government’s main reasons for introducing the measure.

 

The second new measure contained within the new law is where HMRC can issue personal liability notices against company directors following tax avoidance and evasion penalties and repeated insolvencies.

 

There are various conditions which must be met before HMRC can issue personal liability notices, but all involve scenarios where the company is insolvent (or likely to be).  In the tax avoidance and evasion cases, the directors can be held liable for all of the tax avoided (and any penalties as a result).  However, in the circumstances following repeated insolvencies the directors can be held liable for debts of the failed companies as well as for any future tax debt of a new company.

 

Before you come over all Lance Corporal Jones (Don’t Panic!) this legislation is aimed at those who act in a deliberate manner of tax avoidance/evasion.  It is not aimed at those who have missed the payment deadline for this month’s PAYE (provided you do still pay that is) or your overall circumstances demonstrate, as a director, you have acted honestly and fairly to creditors as a whole.

 

Having said that, the key message that should be derived from this legislation is if you feel there is an increasing difficulty in managing the company tax affairs, or liabilities as a whole, then seek early advice.  Creditors, including HMRC, are generally understanding where they learn of a possible issue at an early stage rather than wait until the need for enforcement procedures commences.  In addition, the earlier advice is sought the more options there are available.

 

Anyone with an insolvency related issue can contact PBC on 01604 212150.  Our initial consultations are always free, confidential, impartial and no obligation.

Jamie Cochrane

Is Corporate Recovery Doomed?

There is a saying about giving with your right hand but then take back with your left.  Well, that appears to be the case where the Government are concerned.

Firstly, the Corporate Insolvency & Governance Act 2020 became law and is intended to assist businesses recover post the COVID-19 pandemic.  While I am sceptical about this, any remote positivity was dashed with the Finance Act 2020 receiving Royal Assent on 22 July 2020.  The significance of this is the re-introduction of Crown preferential status on all insolvencies.  This is despite significant objection from various parties and some MPs.

With effect from insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  Therefore, this includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  Secondary preferential means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.

As a direct result of this, The Association of Business Recovery Professionals estimate that £1 billion of potential lending will be removed, making recovery and turnaround harder as the access to new working capital is reduced.  To compound the recovery difficulties, whether a business can secure fresh borrowing or not, using a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option.  This is due to the unpaid taxes ranking ahead of the general body of creditors and having to be fully paid before those unsecured creditors receive any funds.  Furthermore, it is likely that there will be a significant HMRC debt as our experience is HMRC are the first creditor to go unpaid during any cash-flow crisis – indeed this is one of the Government’s main reasons for introducing the measure.

On first glance, Crown preferential status will only impact those where the insolvency commences on or after 1 December 2020.  However, a cynic would point out there may not be any appetite for HMRC to support the restructuring of a business prior to this date where they remain an unsecured creditor, ranking with creditors as a whole.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

The Preference Trap?

Jamie CochranePBC Logo

My most recent blog on the Chancellor’s support schemes  (available here) included comments on the Bounce Back Loan scheme.  One question I have received following that blog focussed on how using the funds from the loan to pay off debts personally guaranteed by the director would be treated (as the Bounce Back Loan scheme does not involve any personal guarantee) and I thought I would take the opportunity to explain the situation.

 

The Insolvency Act 1986 states “a company gives a preference to a person if that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or liabilities and the company does anything…..[which puts] that person which, in the event of the company going into insolvent liquidation, will be better than the position he would have been if that thing had not been done”.

 

So let’s unpick that legal jargon for a moment by revisiting the scenario.  The director was a guarantor for a company debt.  The company did something which put the director in a better position – by paying off the debt which had been guaranteed and removing the potential for the creditor to call on the guarantee.

 

However, that is not the whole situation.  The liquidator has to prove three things:

 

  1. The transaction took place at a relevant time. As the director is a connected party, the transaction must have taken place in the two years prior to the liquidation.

 

  1. The company must have had the desire to prefer the individual who received the preferential treatment. As the director is a connected party, this desire is presumed (but can be rebutted by the director).

 

  1. The company was insolvent at the time of the transaction or as a result of the transaction. Clearly, this fact is subjective on the facts of each individual case.

 

Let’s return to our scenario.  Could the company have taken out a bounce back loan to repay other business borrowing (whether or not guaranteed) to take advantage of the low interest rates on the Bounce Back Loan versus their existing borrowing?  Therefore, the director may argue that the desire was not there as they were seeking to improve the cash-flow of the business, but that argument would be stronger if contemporaneous notes (something I strongly advise) were made explaining the thinking behind the transactions, particularly as such transactions may be challenged several years later.

 

As previously stated, each scenario will depend on its own facts.  Should you be worried about your position or you have another insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to jamiecochrane@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Will the government support schemes make things worse?

Whilst we all might have our views on how Boris Johnson, Matt Hancock et al have handled the health impacts of the Covid-19 pandemic, one politician who has emerged with his reputation enhanced is the Chancellor of the Exchequer, Rishi Sunak, and that’s not just because he has been nicknamed “Dishy Rishi”.

 

Whilst there is inevitably some people who have fallen through the cracks, the Chancellor’s support schemes have included the Coronavirus Job Retention Scheme (commonly known as the furlough scheme) – with 9.4million employees furloughed as at 5 July 2020, the Self-Employment Income Support scheme – with 3.5million people supported, and CBILS and Bounce Back Loans totalling £45billion as at 5 July 2020.

 

While this is a staggering amount of support that Mr Sunak has offered to UK businesses, there’s the potentially slightly controversial opinion that these schemes make things worse for the directors and their companies.

 

At PBC, we always raise awareness about seeking advice at the earliest possible opportunity as this gives the greatest chance of survival, the largest range of options available and minimises the risk of directors entering the “elephant traps” of antecedent transactions or breaches of their statutory duties.  But we are worried that some directors are believing that the government support schemes, combined with the suspension of wrongful trading provisions from 1 March – 30 September 2020, mean that their business will be fine once the Covid-19 restrictions are fully lifted and trading conditions return to business as normal.

 

However, while the furlough scheme helped towards wages and other schemes were designed to support business survival, liabilities such as utilities, rent, financial commitments etc will have continued to accrue.  In addition, it is unlikely that conditions will return to a “Pre Covid normal” for a significant period of time and businesses should be focussing on how they will adapt to the “new-normal” and ensure that they remain solvent and their cashflow is healthy.

 

Our concerns about the schemes making things worse are highlighted by a well published survey that reports just under half of Bounce Back Loans will not be repaid.  Are these loans being taken out purely to see the business survive for a few more months and enable the director to profit from the business before it fails?  Bounce Back Loans were publicised with no liability on the director or that no recovery action could be taken against a borrower’s main home.  However, while the loans were for business purposes only we have heard of scenarios where the loans have been taken into the company and then used to pay off the director’s personal debt.  This could lead to personal liability for the director and we urge all directors to seek independent advice on the use of the benefits received from the schemes

 

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to jamiecochrane@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Jamie Cochrane

Seller beware? – The Corporate Insolvency and Governance Bill

CashflowAs a service provider or supplier, what is your first reaction when you hear your customer is entering into an insolvency process?  Anger, frustration, can I recover items supplied or, how do we make good the financial hole that bad debt will create?

It is an emotional event but, what if you were told your termination clause is no longer enforceable or you must continue to supply the insolvent customer?

On 4 June the Corporate Insolvency and Governance Bill (“The Bill”) received its second reading in Parliament and it is envisaged to become law by the end of June.  It will introduce some temporary provisions (to cover the COVID-19 lockdown) that will have retrospective effect and some permanent law, which is the focus of this editorial.

So, let us explore the four key provisions that are all aimed and restructuring and rescuing a company:

Restructuring scheme

This appears to modernise the current scheme of arrangement available under the Companies Act.  It is most likely a tool used for complex debt restructuring where there are several classes of creditors.  For example, a retail chain where there are suppliers, employees, landlords and financial institutions that are likely to be affected in differing ways.

The big reliance of this scheme is, what has been referred to as “Cross-class clam down”.  Try saying that quickly!  What this means is classes of creditors may out vote a dissenting class of creditor, provided the dissenting class of creditor will not be worse off than if an alternative insolvency procedure was used.  This does represent a shift in the balance of power in creditor voting

Moratorium

This is the largest part of the Bill and sets out a new provision designed to give an “Eligible company” the opportunity of a short holiday from creditors while it looks at ways to restructure its business.

Where a company is not subject to any insolvency proceedings the directors can file an application at court for a moratorium, without any notice to creditors.  The moratorium comes into force immediately upon the application being filed at court.

So, what does this mean?  A moratorium has very similar effects to administration whereby creditors cannot enforce any security held, landlords may not exercise their right of forfeiture or peaceable re-entry and any legal processes may not be commenced or continued.

The initial period will be 20 business days (this maybe increased to 30 business days for “Small companies”).  The directors may extend it for a further 20 business days, or with creditor consent it can be extended for up to 12 months.

While it needs an insolvency practitioner involved (to be called, “The Monitor”) their position is generally to monitor the company during this period, primarily based upon information provided by the directors.  It is envisaged a moratorium will be used as a form of protection while the company considers and/or proposes to enter into a company voluntary arrangement, although it could result in the outcome looking more terminal whereby liquidation may be the outcome.

Any supplier who supplies the company during the moratorium period must be paid (or payment provided for) otherwise the moratorium should be terminated.  Once terminated, any unpaid post moratorium creditors will enjoy a “Super priority” in the subsequent insolvency procedure.  However, that could be small consolation if there are no distributable assets!

Ipso facto clauses

Okay, most of us will ask what that means and does it apply to me?  In English, this is a clause within your terms and conditions of trade that state the contract shall terminate upon the customer entering into any form of insolvency.

A new section 233B is being inserted into the Insolvency Act whereby such termination clauses shall be considered void and no longer be enforceable.

Continuation of supply

The Insolvency (Protection of Essential Supplies) Order 2015 already prohibits suppliers from refusing to supply an insolvent company and/or seeking to vary the terms as a condition of continued supply.

However, the Bill takes this further and makes it clear it is unlawful to hold out for ransom payments (ie demanding pre-insolvency debts are paid as a condition of supply).  This could cause some practical difficulties, including if you have credit insurance, yet pre-insolvency you had reached the credit limit with the insolvent company.  The only protection it appears you have is being told your post insolvency debt shall be paid as an expense of the moratorium period or, failing that, holds “Super priority” in the subsequent insolvency.  Small comfort, I would suggest.

The key message for suppliers is to keep track of your customers (in terms of the warning signs leading to failure) and ensure they stay within credit limits you feel comfortable providing.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk