Restructuring and insolvency
In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for restructuring and insolvency.
Key developments in 2020
The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. The changes introduced by that Act were some of the most significant made to English insolvency law for decades.
Under the Act a number of new measures intended to relieve the financial burden on businesses during the COVID-19 outbreak and to increase their chances of survival have been put in place.
These measures include the introduction of two new restructuring processes: (i) a stand-alone moratorium intended to give companies breathing space from creditors and (ii) a restructuring plan procedure. The restructuring plan is similar to a scheme of arrangement but, unlike a scheme, allows for the possibility of cross-class cram-down of creditors. Insurance companies are not eligible to use the moratorium process.
New measures were also introduced to prevent suppliers of goods and services from terminating their contracts with a customer because that customer has entered into an insolvency process. Those provisions do not affect the supply of insurance services.
The three new processes highlighted above are all permanent changes to English insolvency law. In addition to these changes, the Act also introduced a number of temporary measures. These included the suspension of a creditor's ability to bring a winding-up petition or statutory demand where the debtor's inability to pay was due to COVID-19. That suspension applies until 31 December 2020 (unless extended further).
The Act also sought to address the position of directors by exempting them from liability for wrongful trading for any worsening of the company's financial position between 1 March 2020 and 30 September 2020. The suspension for wrongful trading did not apply to directors of insurance companies.
What to look out for in 2021
As at September 2020, the number of company and individual insolvencies remained low in comparison with the figures for the same month in 2019. In the context of the COVID-19 pandemic this may appear surprising. However, the UK government's far-reaching fiscal and legal support for struggling businesses appears (at least in the short term) to have enabled large parts of the economy to weather the storm.
UK government support measures include the provision of loan facilities and credit support schemes, the furlough scheme and the temporary easing measures introduced by the Corporate Insolvency and Governance Act 2020.
It is widely expected that, upon the expiry of these measures, it is likely there will be a significant increase in the number of businesses and individuals facing financial difficulty and potentially insolvency.
The expected upturn in insolvencies in 2021 is likely to have a significant impact upon the insurance industry. In particular, this, together with the impact of COVID-19, may well lead to a considerable increase in insurance claims in areas such as business interruption, events insurance and D&O insurance, all of which are at risk of being engaged when businesses face financial distress and/or enter insolvency.
Many company directors may find themselves exposed to insolvency-related claims. The exemption excusing directors from liability for wrongful trading expired on 30 September 2020. Furthermore, even whilst this exemption was in place, it did not apply to any other claims that could still be brought against the directors (such as claims for breach of duty, misfeasance etc). There is also a risk that under the false belief that directors would be insulated from all claims during the COVID-19 pandemic, that the incidence of challengeable conduct may have increased.
Whilst, for some companies, the temporary measures introduced by the Government may have helped rescue viable businesses, for other weaker companies it may have just delayed the inevitable during which time they may have incurred further liabilities and potential further exposure for their directors and ultimately their D&O insurers.
Authored by Will Beck.
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