The Government has announced new legislation is coming to help companies facing cashflow or administrative difficulties due to COVID-19.
Giving directors of companies who face cashflow issues due to COVID-19 certain “safe harbour” protections from normal solvency-related duties;
Enabling businesses affected by COVID-19 to place existing debts into hibernation yet continue trading;
Allowing greater use of electronic signatures;
Permitting normal legislated deadlines for companies, incorporated societies, charitable trusts and other entities to be extended temporarily by the Registrar of Companies; and
Granting temporary relief for entities unable to comply with requirements in their constitutions and rules because of COVID-19.
We note that the Government still needs to receive Parliament’s agreement to these changes, and for the changes to apply retrospectively to the date of the Government’s announcement (being 3 April 2020).
Directors are usually subject to the following duties under sections 135 and 136 of the Companies Act 1993 (the Act):
s 135 (Reckless Trading) A director must not agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
s 136 (Duty in relation to obligations) A director must not allow the business incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
In the normal course of events, directors who are found to have breached those duties can face personal liability.
To protect directors from such claims over the next six months (to encourage them to continue to undertake their important role) the Government has announced its plans to introduce temporary “safe harbour” provisions to apply where:
in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months as a result of the impact of COVID-19 on the company or its creditors;
the company was able to pay its debts as they fell due on 31 December 2019; and
the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).
These provisions may assist directors to carry more risk than they may otherwise be comfortable with – thereby preventing them putting an otherwise viable company into liquidation. However, it is more important than ever that directors have accurate and current financial information, both for past performance and future projections. There are no changes to director’s duties to act in good faith and to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.
Business Debt Hibernation
Similarly, the proposed Business Debt Hibernation (BDH) regime intends to make it easier for businesses to keep trading during COVID-19, despite significant cashflow pressures resulting from the pandemic. It intends to:
encourage directors to talk to their creditors with a view to putting together a simple proposal for putting the business into hibernation;
allow for the directors to retain control of the company, rather than passing control to an insolvency practitioner;
provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in BDH; and
be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.
A process will need to be followed to put a BDH scheme in place as it won’t be automatic. The business will need to meet a (to be determined) threshold, put a proposal to their creditors and obtain agreement from 50% (by number and value) of those creditors within a month. However, during the proposal process, there will be a one month freeze on the enforcement of debts. A further six months moratorium will be available if the proposal is passed.
While an entity is in BDH, it will be able to continue to trade, subject to any restrictions agreed with creditors. Once passed, it will be binding on all creditors (but not employees), not just those that voted for it.
To encourage businesses to continue to transact with a company in BDH, the Government plans to make new payments or dispositions of property exempt from the voidable transactions regime (unless it is to a related party). However, transactions will still need to be entered into in good faith by both parties, on arm’s length terms and without intent to deprive existing creditors of the company.
Most businesses will be eligible for BDH, including companies, trusts and partnerships. However, sole traders, licensed insurers, registered banks and non-bank deposit takers are exempt.
Pitt & Moore Lawyers can provide tailored advice on how your business may rely on the announcements made by the Government.
Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.