There is a proposed temporary move to allow a company to place existing debts into hibernation for six months. The objective is to allow otherwise good businesses to trade their way through the COVID-19 induced economic storm an alternative to liquidation – and this must be done with the agreement of 50% of the company’s creditors.
These measures have not yet been passed by Parliament – although it is anticipated that this will happen and that it will be retrospective. The relief will be two-fold: A safe harbour from the directors’ duties under s135 and s136 of the Companies Act 1993 – and the ability to achieve a moratorium on payment of business debt.
Safe Harbour from Directors’ Duties
Essentially sections 135 & 136 state that a director must not allow the business to be carried on in a manner likely to create substantial risk of loss to creditors – and must not agree to the company incurring an obligation without reasonable grounds for believing it will be able to meet that obligation.
The safe harbour sanctions the director to keep trading – and take on new obligations – over the next six months without falling foul of sections 135 and 136 providing:
- The company is facing significant liquidity problems in the next six months as a result of COVID-19; and
- The company was able to pay its debts as they fell due on 31 December 2019; and
- The directors consider it more likely than not that the company will be able to pay its debts as they fall due within the next 18 months.
Business Debt Hibernation
Subject to certain conditions, directors may give notice to creditors that the company be placed into Business Debt Hibernation. There will be a one month moratorium on enforcement action against the company – with a further six months if the proposal is passed by 50% or more (by value and number) of creditors.
- If the proposal is passed by creditors, the company can continue to trade during the six month period – and the creditors’ rights of enforcement will be suspended.
- If the proposal is not passed by creditors, they may enforce the debts as usual.
The Business Debt Hibernation regime will be available to companies, Trusts and partnerships – but not to sole-traders.
These changes will not mean directors are free to disregard the consequences of their actions for the next six months as other protections in the Companies Act such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts will remain in place.