CORONAVIRUS INSOLVENCY LAW REFORM

CORONAVIRUS INSOLVENCY LAW REFORM

HM Government is proposing to assist companies survive the current crisis by temporarily suspending the law on wrongful trading and introducing a rescue procedure akin to Chapter 11 in the USA.

WRONGFUL TRADING

Directors can be personally liable for wrongful trading from the point they ought to have known that there was no reasonable prospect of their company avoiding insolvent liquidation or administration. From then, they must take every step a reasonably diligent person would have taken to minimise the potential loss to creditors.

Assuming the company was not in financial difficulties before the Coronavirus struck, such a point would occur when the company's bank refused rescue facilities. Until then, most companies would expect to be rescued subject to the following.

The definition of insolvency needs to be amended. Now, a company is insolvent if either it is unable to pay its debts as they fall due OR if the value of its assets is less than its liabilities 'taking into account its contingent and prospective liabilities'.

The courts have struggled to make sense of the assets/liabilities concept. Assets must be taken at their true value but recent events show that the true value one week can be slashed the next. I am aware of two cases where the assets of a company being wound up as insolvent surged in value to exceed its liabilities!

The Supreme Court has pointed out that it is absurd to match a bond repayable in thirty years against the present value of assets. Then again, how do you value an asset for which there is no willing buyer?

I suggest that the asset/liabilities test should be abolished as long as the company has the means to pay its debts as they fall due.

RESCUE SCHEMES

The proposal is to allow management to propose its own rescue for Court approval based on Chapter 11 of the US Bankruptcy Code. It is instructive to see what Americans say about it namely: "Because Chapter 11 is the most expensive and complex form of bankruptcy, most companies explore all alternative routes, before filing for one." The procedure relies on numerous Court applications and the Judge has power to substitute an insolvency expert for the management if creditors persist in objecting.

Schemes of arrangement under UK law do need reform. At present, a scheme requires approval by a majority in number representing three quarters in value of each class of creditors and Court decides whether the correct procedure has been followed. Disputes can arise about what constitutes a separate class.

My view is that all unsecured creditors should be regarded as a single class. If the result is unfair to a particular creditor in a special position, then the Court should require the scheme to be suitably amended and the creditors meeting reconvened.

James Lingard is a retired City solicitor and insolvency practitioner, the original author of Lingard's Bank Security Documents now in its 7th edition and the founding president of the Insolvency Lawyers Association. He has recently published a historical novel, THE GIRL WHO DISAPPEARED, set around WW2 about his parents and early life. https://www.amazon.co.uk/Girl-Who-Disappeared-James-Lingard-ebook/dp/B07YMZHKS9