Now is a good time to learn about this new legislation, says Andrew Taylor
The Corporate Insolvency and Governance Bill will be the biggest reform of the UK's restructuring and insolvency framework in more than 15 years. For the hospitality sector, it is welcome news, giving bars and restaurants some options to help them to survive a period of unprecedented economic hardship. So, what are the changes and which businesses are eligible?
How to obtain a moratorium
A moratorium is a temporary suspension of an activity, in this case, the repayment of debts. For hospitality companies that are struggling financially, a 20 business-day moratorium will give them the chance to restructure or seek new investment without creditors taking action to recover their debts.
In order to obtain a moratorium, an organisation's directors will have to make a statement confirming that the company cannot pay its debts or will be unable to do so soon.
To ensure the moratorium process is carried out correctly, a licensed insolvency practitioner must act as a ‘monitor'. Their role involves:
- making an official statement confirming that the company is likely to recover as a result of the moratorium;
- ensuring that the business complies with the requirements of the moratorium; and
- authorising the sale of assets outside of the normal course of business.
It is possible to extend the initial 20 business days by a further 15 by filing certain statements with the court. Within the hospitality industry, which is facing a slow recovery, this extension could be a further much-needed lifeline. However, there are limitations to which businesses can obtain a moratorium, so bars and restaurants must look into this before applying.
A winding-up petition is a legal action taken by a creditor against a business that owes them money. To further protect companies from insolvency, the bill also includes a provision to restrict these winding-up petitions and statutory demands from being issued to companies where Covid-19 has stopped them from being able to pay their debts. In the case of the hospitality sector, this would seem to apply to the majority of struggling businesses.
Nevertheless, if a creditor believes either that Covid-19 has not impacted the company financially or that the facts relied upon in the petition would have arisen without the pandemic, then a petition can still be presented.
Normally, wrongful trading provisions offer protection to creditors by placing personal liability on directors of businesses that continue to trade, even when there is no prospect of them avoiding insolvency.
Under the new bill, those who are eligible for a moratorium will also benefit from a temporary suspension of wrongful trading provisions, meaning that directors will be protected from any action to recover debts that were owed by the company before its insolvency from them personally. This suspension will last for four months, with retrospective effect from 1 March 2020 until 30 June 2020.
Although this is a welcome relief for the hospitality industry, which may have to continue trading in financially challenging circumstances, it is vital that directors continue to act appropriately in their dealings with creditors. The temporary suspension of wrongful trading does not mean that claims cannot be brought against directors who have breached their duties under common law or the Companies Act 2006.
A warning to the government
All this being said, if bars and restaurants are unable to achieve viable capacity then these support measures will only help to a certain extent. For the hospitality sector to truly survive and thrive, rules such as two-metre social distancing will have to be relaxed. Currently, this rule means that many venues may only be able to function at around 30% capacity, which is not economically feasible in the long term.
The hospitality sector may have some protections under the bill, but it is not a magic bullet for the extraordinary challenges faced by the sector. A review is set to take place regarding the two-metre rule; however, the government cannot afford to delay if it is to ensure businesses can reopen viably.
The hospitality sector may have some protections under the bill, but it is not a ‘magic bullet' for the extraordinary challenges faced by the sector
A warning to businesses
The final version of the bill is set to be given Royal Assent this year, but this is subject to change due to the addition of further regulations. Currently, the deadline for making additional regulations is 30 April 2021, so the ‘final' version might not be so final.
Even so, those in the hospitality sector should be assessing the proposed changes and deciding which option(s) may suit them best. In order to come out of the other side of this pandemic, businesses must be proactive in learning about access to support measures and take professional advice where appropriate.
Andrew Taylor is partner and head of litigation and restructuring at law firm Shakespeare Martineau
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