Updated: 24th June 2020
As the economic impact of coronavirus continues to cause financial distress across all sectors, you may be wondering whether creditors can take your business to court during the lockdown.
New rules are to be introduced by the government to ease the extreme financial situation businesses are experiencing, and promote continuation of trade whilst rescue and restructuring procedures are undertaken.
So what happens if your creditors threaten to take your business to court at this time? Are you at risk of enforced closure during coronavirus lockdown?
Proposals to change the rules when companies enter restructuring procedures were initially made in 2018, and the government may decide to introduce these without alteration. If so, a number of amendments could be brought into law, including:
So if your company is experiencing severe creditor pressure as a result of coronavirus, and you’re seeking financing or restructuring, your creditors may be unable to take further steps to close your business down, and could be forced to agree proposals for a new repayment plan.
How does the new moratorium work?
The moratorium is similar to that in place when companies enter administration, but in this case is overseen by a ‘monitor’ rather than an administrator, who protects the interests of creditors whilst directors seek to save their business.
The initial period of the new moratorium is 28 days, although it may be possible to extend it for up to three months on application. If you fear your business may be taken to court during lockdown, you need to appoint an authorised monitor prior to filing a notice at court of your intention to enter this moratorium period.
If your business is already subject to a winding up petition, it doesn’t mean it’s too late to benefit from the amended rules - in this case you need to make a direct application to the courts to enter the new moratorium.
The new regulations also address the ongoing need for businesses to access supplies whilst undergoing restructuring, and prevent suppliers from enforcing termination clauses in their contracts.
The ability to obtain supplies unhindered is a fundamental part of successfully continuing to trade whilst restructuring, and supports the company’s efforts to recover for the long-term. In cases of extreme financial difficulty, however, a supplier’s financial position may be safeguarded by the court if they make it known.
The restructuring plan can be used as a standalone measure or as part of the new moratorium, and once in place, prevents creditors from taking your business to court during the lockdown.
Creditors vote on the proposals made within the plan, and 75% (by value of debt) are required to vote in favour for the plan to be implemented. Crucially, creditors that vote against the restructuring plan are legally bound to its terms and conditions if sufficient numbers vote in favour.
When these three measures are brought into legislation they’ll provide further protection for businesses under threat of court action during the coronavirus pandemic, and ensure companies benefit from a little ‘breathing space’ to restructure.
If you would like more information on these changes to the UK insolvency framework, Real Business Rescue can help. Please contact one of our partner-led team to arrange a free confidential consultation.
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