UK insolvency legislation could benefit luxury companies

16 Aug 2020 , 9:23pm

Companies within the luxury sector can use the reforms enacted by the new UK Corporate Insolvency and Governance Act 2020 to their best advantage say Bird & Bird partners Joss Hargrave and Victoria Hobbs.

The new UK Corporate Insolvency and Governance Act 2020 (the "Act") represents big changes to the current insolvency legislative framework and potentially to companies within the luxury sector which may be affected by an insolvency within their supply chain. It  has introduced new protections for insolvent companies against creditors wishing to exercise termination rights within supply contracts and against more aggressive creditor action. The Act introduces reforms which are intended to be both temporary (as a response to the global coronavirus pandemic) and permanent. These new provisions will be especially welcomed by those in the luxury sector, as the sector has been particularly affected by the pandemic.

Permanent reforms

• Termination clauses in supplier contracts will cease to apply on insolvency. Suppliers of goods and services will not be able to exercise insolvency related provisions (also known as "ipso facto" clauses) in their contracts when the other party enters into an insolvency process (including the new processes introduced by the Act itself) subject to certain exceptions.

• A company will be able to benefit from a moratorium from creditor action without entering into administration.

• A new restructuring procedure will be introduced.

Temporary reforms

• Restrictions on the use of statutory demands and winding up petitions (which prior to the Act some landlords had been seeking to use against retailers who were delaying payment of rent or seeking to renegotiate lease payments).

• Suspension of liability for wrongful trading.

• General meetings of companies can be held "by any other means", whether permitted by its articles of association or not.  

Key takeaways – For businesses seeking to rely on the Act

The greater protections for companies facing insolvency introduced by the Act will no doubt be especially welcome in the luxury retail sector which has been particularly stricken by the coronavirus pandemic.  For companies seeking to rely on any of the measures outlined above, the following considerations may be of practical benefit:

• Whilst there is a temporary prohibition on the presentation of winding up petitions until 30 September 2020, this provision does not apply if the creditor can demonstrate it has reasonable grounds for believing that i) coronavirus has not had a financial effect on the company, or ii) the grounds on which its winding up petition is made would have arisen even if coronavirus had not had a financial effect on the company.  It is therefore prudent to assess the impact of the pandemic, if any, on the insolvent company and to make note of any evidence of their inability to pay their debts prior to the pandemic.

• If a creditor threatens to present a winding up petition in spite of the coronavirus pandemic having a demonstrable impact on the debtor’s finances, an injunction to restrain the presentation may be obtainable.  Travelodge recently successfully applied for such an injunction against the landlords of two of its sites.   The court’s judgment was given partly in anticipation of the introduction of the Act and partly on the basis that failing to grant the injunction would harm the interests of the wider creditor group.  The Travelodge case contrasts sharply with another recent case with a comparable factual background.   In that case, the injunction application failed because it was held that the debtors’ failures to pay were not attributable to the pandemic and pre-dated the outbreak. 

• If looking to take advantage of the new restructuring plan, it is sensible to begin negotiations with creditors as soon as possible as approval requires 75% in value of the creditors in each class.  If approval is not obtained, the Court can approve the plan and can bind dissenting creditors. Giving thought to any guarantees and securities that can be offered to creditors may assist in negotiations.   

Key Takeaways – for creditors/ suppliers to assist in minimising financial exposure

However the reforms also provide additional obstacles for creditors and/or suppliers in recovering what they are owed.  The following suggestions may assist in minimising both frustration and financial exposure:

• Companies should keep a close eye on overdue invoices, with a view to taking action before the debtor becomes insolvent in order to avoid any termination clauses becoming ineffective.  

• Ensuring payment terms are as tight as possible will also assist in maintaining cash flow and keeping track of overdue payments.  

• Similarly, keeping a close eye on the terms of agreement may provide other avenues for termination in the case of non-performance that isn’t insolvency-related and therefore embargoed.  

• Lastly, where the debtor is undergoing restructuring, entering into discussions with the directors and/or insolvency practitioners may help to ensure a creditor/supplier’s interests are considered and protected.  

Joss Hargrave and Victoria Hobbs are partners at Bird & Bird