Insolvency in a time of coronavirus

Insolvency law has moved rapidly over the last three months due to the economic effects of coronavirus.

Fundamental changes have been made, with more in the pipeline. What follows is merely an overview of the changes as at 15 June 2020.

Personal insolvency measures

First, the Coronavirus (Scotland) Act 2020, which came into force on 7 April. In addition to introducing measures to protect tenants, the Act affects the moratorium on diligence under the Bankruptcy (Scotland) Act 2016. It provides that the period of moratorium shall be extended from six weeks to six months. It also temporarily removes the prohibition on a debtor applying for more than one moratorium in a 12-month period. The Act will remain in force until at least 30 September 2020, but with the ability for the Parliament to extend its provisions, potentially until 30 September 2021.

The Scottish Parliament subsequently passed the Coronavirus (Scotland) (No 2) Act 2020, which came into force on 27 May. This Act introduced further temporary changes to personal insolvency law. As with the first Coronavirus Act, the provision are subject to expiry on 30 September 2020 unless extended. The maximum extension will be to 30 September 2021.

The main provisions of the No 2 Act affecting insolvency are:

• An increase in the minimum debt level above which a qualified creditor may commence a petition for sequestration, from £3,000 to £10,000.
• Reductions and waivers of certain fees for debtors who seek to have themselves sequestrated under the MAP (minimal asset process) or bankruptcy application procedure.
• Allowing increased use of electronic communications in sequestrations governed by the 2016 Act. The Act also allows for the use of electronic signatures on most forms under the 2016 Act, and for virtual creditors’ meetings.
• Extension of the period of time for a trustee to propose a debtor contribution order from six to 12 weeks.
• Finally, the Act also provides for the reopening of the register of inhibitions. One consequence of this is the ability now to register warrants to cite in that register as required.

Corporate insolvency measures

At time of writing, the Corporate Insolvency and Governance Bill is about to go to the committee stage at the House of Lords. Once in force, it will introduce major change to the corporate insolvency landscape. Some of those changes will be temporary, in reaction to the coronavirus pandemic. Others are intended to be permanent, based on proposals which have been under consideration for a number of years.

Temporary measures

Among the most eyecatching of the temporary measures introduced to protect business during the pandemic is the suspension of the wrongful trading rules. As with most of the bill, the effect of this provision will be backdated to 1 March 2020. It achieves its objective by introducing a presumption that a director is not responsible for any worsening of the financial position of the company during the pandemic.

The other retrospective temporary measures introduced by the bill relate to winding up petitions. The bill will prevent a creditor relying on a statutory demand to found a winding up petition if that demand was served between 1 March and 30 June 2020, and the petition was commenced on or after 27 April. The bill also requires the court to refuse any petition for winding up where the court is not satisfied that a company’s inability to pay its debts was not caused by the pandemic.

Much has been written on the retrospective nature of these provisions and the potential effect on petitions already decided. The English courts have already begun to rely on the bill to refuse petitions presented (see Re: A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch)).

To offset some of the effects, the bill proposes to extend the period after which certain transactions such as unfair preferences may be challenged by six months.

Permanent measures

Permanent measures introduced by the bill include:

• A new moratorium for companies preventing enforcement action whilst companies investigate a rescue option.
• An extension of the prohibition on termination of supply contracts, currently applying to utilities contracts, so that insolvent businesses may maintain supplies whilst they continue to trade.
• The introduction of a new restructuring plan procedure, similar to the existing scheme of arrangement procedures, but with different voting and approval procedures.

Each of these measures is deserving of an article of its own. It is a testament to the speed and extent of change that they must be treated as mere footnotes for the purpose of this briefing.