The government has proposed a series of radical reforms to the corporate insolvency regime which will have a significant impact on creditor and supplier rights. Food suppliers are likely to be at the forefront of changes as they include limiting the ability to terminate contracts when the counter-party becomes insolvent.
Some of the detail is set out below.
Temporary restrictions on creditor rights
First and foremost temporary provisions limiting the steps creditors can take to cushion debtors in the short term from anticipated economic effect of the COVID-19 pandemic are being introduced. They are:
- Voiding statutory demands served between 1 March and 30 days after the bill comes into force – effectively preventing debt collection via an insolvency process;
- Adding hurdles to winding up petitions presented during the same period - a creditor will have to have reasonable grounds for believing that coronavirus has not had a financial impact on the company or that the facts giving rise to the grounds would have still existed even if the coronavirus had a financial impact.
There will also be a presumption that for the purposes of wrongful trading, a director is not responsible for any worsening of the financial position of the company or its creditors that occurs from 1 March 2020 to 30 days after the bill is passed – this may give directors confidence they need to keep the business going .
Contrary to the many media reports in April, this is not limited to landlords collecting in rent - any creditor owed money by companies struggling as a result of the pandemic will find their rights restricted, probably until at least the end of July.
There are also further reforms included will undoubtedly impact those in the food industry. In particular:
- The introduction of a new 20 business day moratorium (potentially extendable by up to a year), monitored by an Insolvency Practitioner which allows the company to consider a rescue plan free from creditor action.
- Restricting the ability to exercise a contractual termination right which is triggered by an insolvency event, or to exercise a termination right whilst the company is in an insolvency process for a pre-insolvency breach. This would also apply when a company has the benefit of the proposed moratorium.
Legislation is being rushed through parliament and could well be in force by the beginning of July having only been published on 20 May.
These changes are intended to expand the restructuring toolkit available to struggling businesses but news that termination rights are to be restricted will be met with some concern by those who depend on reliable supply chains to be able to perform themselves. We will cover the details in a later update.
For more information or if you have any queries on this please contact Lino Di Lorenzo on Email firstname.lastname@example.org.