Changes to Insolvency Laws and Government Loans Grants and other Business Support

Introduction

The UK Government has announced a series of government grants, loans and schemes to protect businesses that have been adversely affected by the recent Covid19 outbreak. In particular, the UK Government has sought to:

  • assist companies with their business cash flows; and
  • prevent companies from going insolvent and/or liquidating as a direct result of the Covid19 outbreak.

In order to assist companies with their business cash flows, the UK Government has introduced the following measures (the “Support Schemes”):

  1. the Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund;
  2. the Coronavirus Business Interruption Loan Scheme;
  3. the Coronavirus Job Retention Scheme; and
  4. the Coronavirus Self-Employment Income Support Scheme.

Companies may, therefore, be able to benefit from some of the Support Schemes in order to balance the cash flow disruptions caused by the Covid19 outbreak.

Furthermore, the UK Government has also proposed amendments to the insolvency laws in relation to wrongful trading and moratoria to protect both the affected company and the directors themselves (though the proposals relating to moratoria are not confirmed to go ahead). These changes are further discussed below. Hence, companies and directors may be able to benefit from the Support Schemes whilst potentially availing themselves of the changes made to the relevant insolvency laws to ensure protection for their personal positions.

At Wordley our Corporate Team have strong relationships with Insolvency Practitioners and can help with both restructuring and more formal insolvency procedures as well as being able to help with information and guidance on the Government’s Support Schemes. Further our connections with funders may help with short to medium term investments where businesses are viable in the medium term but for the current Covid19 outbreak.

Table of Contents
1. The Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund
2. The Coronavirus Business Interruption Loan Scheme
3. The Coronavirus Job Retention Scheme
4. The Coronavirus Self-Employment Income Support Scheme
5. The Government Amendments to Insolvency Laws during the Covid19 Outbreak
6. UK Partners’ Contact Details

1. Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund

A. Introduction

In response to the COVID-19 outbreak, the UK Government has announced a series of support and grant packages for small businesses and businesses in the retail, hospitality and leisure sectors. There currently exists two funding schemes:

  • Small Business Grant Fund (“SBG Fund”)
  • Retail, Hospitality and Leisure Grant Fund (“RHL Fund”)

Both Funds are provided pursuant to the individual business satisfying the “eligibility criteria”, through which the government will reimburse the Local Authorities that pay out the Funds to the eligible businesses.

B. Small Business Grant Fund

Under the SBG Fund, all businesses that are usually in receipt of Small Business Rates Relief (“SBRR”) and Rural Rates Relief (“RRR”) in the business rates system are eligible for a payment of £10,000 subject to the eligibility criteria below.

Eligibility criteria

The following businesses will benefit from the SBG Fund:

  Step
  A. Eligibility  
1. The business has a hereditament.
2. The hereditament was eligible for relief on 11 March 2020:

a. under the Small Business Rate Relief Scheme (including those hereditaments with a Rateable Value of between £12,000 and £15,000 which receive tapered relief); or

b. under the Rural Rate Relief Scheme on the condition that it applies to Section 43(6B) LGFA 1988.
3. The hereditament:

a. applies to section 43(4B)(a) of the Local Government Finance Act 1988 (“LGFA 1988”), and

b. has the value of E being greater than 1 (E >1) (as defined in article 3 of the Non-Domestic Rating (Relies, thresholds and Amendment) (England) Order 2017, SI 2017/102).
    B. Exclusions  
1. Hereditaments that are not eligible for percentage SBRR relief (including those eligible for the Small Business Rate Multiplier) are excluded from the SBG Fund.
2. Hereditaments occupied for personal use are excluded from the SBG Fund.
3. Car parks and parking spaces are excluded from the SBG Fund.
4. Businesses which as of 11 March 2020 were in liquidation or were dissolved are excluded from the SBG Fund.
    C. Definitions and Examples  
1. “Hereditament” means property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list (section 115(1) General Rate Act 1967).
2. In respect of calculating E as per Step A.3(ii) above:
 
a. where the business (i) occupies only one hereditament in England and (ii) the Rateable Value shown in the local non-domestic rating list for the chargeable day (“Day Rate”) is not more than £12,000, E = 5,000,000;  

b. where the business (i) occupies only one hereditament in England and (ii) the Day Rate is between £12,000 and £15,000, E = 3000 / x  

where x = y – 12,000
where ‘y’ is the Rateable Value of the hereditament shown in the local non-domestic rating list for that day; and   

c. in any situation where neither of the above applies, E = 1.  

C. Retail, Hospitality and Leisure Grant Fund

Under the RHL Fund, businesses in receipt of the Expanded Retail Discount with a rateable value of less than £51,000 will be eligible to the following cash grants per property, subject to the eligibility criteria below:

  1. up to £15,000 = £10,000 grant
  2. between £15,000 and £51,000 = £25,000 grant

Businesses in receipt of the Expanded Retail Discount with a rateable value of £51,000 or over will not be eligible for the RHL Fund. Moreover, businesses that are not ratepayers will not be eligible for the RHL Fund.

Eligibility criteria

The following businesses will benefit from the RHL Fund:

  Step   A. Eligibility  
1. The business has a hereditament.
2. The hereditament on 11 March 2020:

a. had a Rateable Value of less than £51,000; and

b. would have been eligible for a discount under the Expanded Retail Discount Scheme had that scheme been in force for that date.
3. The eligible business will receive one grant per hereditament.
    B. Exclusions  
1. Hereditaments that are not eligible for percentage SBRR relief (including those eligible for the Small Business Rate Multiplier) are excluded from the SBG Fund.
2. Hereditaments occupied for personal use are excluded from the SBG Fund.
3. Car parks and parking spaces are excluded from the SBG Fund.
4. Businesses which as of 11 March 2020 were in liquidation or were dissolved are excluded from the SBG Fund.
5. Hereditaments with a Rateable Value of over £51,000.
6. Only one grant may be awarded per hereditament.

D. Additional requirements

The Local Authorities will be responsible for reviewing applications made for the SBG Fund and RHL Fund, and will be responsible for determining whether an applicant is eligible. Where the Local Authority has reason to believe that the information they hold about the ratepayer on 11 March 2020 is inaccurate, they may withhold or recover any grant given and take reasonable steps to identify the correct ratepayer. Moreover, landlords and management agents are urged to support local governments in quickly identifying the correct ratepayers.

Businesses should ensure that in making applications they do not commit fraud in the process by deliberately falsifying their records to gain additional grant money.

Finally, any changes to the rating list (rateable value or to the hereditament) after 11 March 2020, including changes which have been backdated to this date, should be ignored for the purposes of eligibility.

2. Coronavirus Business Interruption Loan Scheme

A. Introduction

The UK Government has also set up the Coronavirus Business Interruption Loan Scheme (“CBILS”) to provide financial support to smaller businesses (“SME”) across the UK that are losing revenue and experiencing cash flow disruption as a result of the COVID-19 outbreak.

The CIBLS is provided by nominated lenders that are accredited by the British Business Bank. There are currently over 40 of these accredited lenders that are offering to provide finance, including high-street banks, asset-based lenders, and specialist local lenders.

An accredited lender is able to lend up to £5 million in the form of term loans, overdrafts, invoice finance, and/or asset finance. In addition, the CBILS also provides a government-backed guarantee for the loan repayments to encourage further lending; however, and more importantly, the borrower still remains fully liable to repay the full loan amount.

B. Key Features

Terms Scope Comment
Facility Up to £5 million The most that an SME/borrower can receive is up to £5 million, which is at the discretion of the accredited lender, having reviewed details of the SME.
Interest Variable The interest is at the discretion of the accredited lender. The UK Government will make a Business Interruption Payment to cover the first 12 months of interest payments plus any additional lender-levied charges.
Finance terms 6 year-facility:

a. term loans
b. asset finance  

3-year facility:

a. overdrafts
b. invoice finance
As per above, the UK Government will make Business Interruption Payments to cover the first 12 months of interest payments plus any additional lender-levied charges.
Security Unsecured facility: up to £250,000  

Secured facility: any amount above £250,000 and up to £5 million
Primary residential property cannot be taken as security under CBILS.  

If a lender is able to offer loans on normal commercial terms without making use of CBILS, it will do so.  

If the SME/borrower wishes to borrow above £250,000, the accredited lender must first establish that the SME cannot provide security before applying CBILS.
Guarantee fee None The SME does not pay a guarantee fee; rather, lenders pay a fee to access CBILS.

C. Application process for CBILS

First, the borrower should approach any of the accredited lenders to receive CBILS. A full list of accredited lenders can be found here.

Second, the borrower should approach the chosen accredited lender directly via the accredited lender’s website. There are currently reports of high demand for CBILS so telephone calls may have some delays.

Third, the accredited lender will make a decision based off its review of the SME, and has the discretion to decide whether it can provide a loan facility to the SME/borrower under CBILS or under normal commercial terms.

If the lender refuses to provide a loan facility, the SME/borrower can still approach other accredited lenders to receive funding.

Eligibility criteria

  Step   A. Eligibility  
1. The loan application must be for business purposes (i.e. in relation to the SME).
2. The SME must be UK-based with an annual turnover of up to £45 million.
3. The SME business must generate more than 50% of its turnover from trading activity. Shell companies are therefore excluded from CBILS.
4. The CBILS-backed facility must be used to support primarily trading in the UK. Therefore, the purpose of the loan cannot be primarily for international trade.
5. The SME/borrower must have a borrowing proposal which:

a. were it not for the COVID-19 outbreak, would be considered viable by the accredited lender, and

b. for which the lender believes the provision of finance will enable the SME to trade out of any short-to-medium term difficulty. 
5. The loan can only be up to £5 million.
6. The SME/borrower will always be liable to repay 100% of the CBILS-backed facility.  
    B. Exclusions  
1. SMEs in the following sectors cannot apply for CBILS:

a. banks and building societies;

b. insurers and reinsurers (but this does not include insurance brokers);

c. public-sector organisations, including state-funded primary and secondary schools;

d. employer, professional, religious or political membership organisations; and

e. trade unions. 

D. Additional requirements

As CBILS-backed facilities are provided by accredited lenders at their own discretion, there is currently an informal (although presently enforced) requirement from some accredited lenders for there to be a personal guarantee on the loaned amount. This has been subject to some public scrutiny by both policymakers and MPs. Currently, there are not any rules set by the UK Government to prevent accredited lenders from requiring personal guarantees, although there are existing reports that this will be a subject for review. Nonetheless, SME/borrowers have the ability to choose from over 40 accredited lenders to receive debt funding, and SME/borrowers should contact each accredited lender on a case by case basis to assess whether there are any additionally imposed requirements.  

3. Coronavirus Job Retention Scheme

A. Introduction

The UK Government has also introduced the Coronavirus Job Retention Scheme (“CJRS”) in order to reduce the number of redundancies caused by business disruption due to the Covid-19 outbreak.

The CJRS helps businesses pay their employees’ salaries in circumstances where the employee:

  1. has been asked to stop working; and
  2. has been kept on the employer’s payroll.

An employee who satisfies both requirements is described as a “furloughed worker” by the UK Government. There is no legal definition for “furloughed worker” in UK law; however, an employee who satisfies both requirements above is usually described as “laid off”.

The UK Government has committed to cover 80% of the wages of furloughed workers with a maximum cap of £2,500 per month.

Importantly, however, it has not been made clear whether an employer will have to demonstrate that they are not in a position to pay the furloughed worker’s wages, and the CJRS is expected to be implemented by the end of April.

B. The workers who are covered

The Chancellor announced that all those who are on pay-as-you-earn (“PAYE”) will be covered by CJRS. However, there has been some scrutiny as limb (b) workers (i.e. a worker who is registered as self-employed but provides a service as part of someone else’s business) are not on PAYE, and therefore may not qualify.

It is also unclear whether employees will need to have been employed at a particular date or worked for their employers for a particular amount of time.

C. Calculating wages

The government has said it will cover 80% of a furloughed worker’s wages up to £2,500 per month. For furloughed workers with a regular salary, it will be easy to calculate the CJRS amount entitled.

However, for employees with variable wages, the calculation is more difficult, as there are complicated rules in employment law that determine what constitutes a “week’s pay”. Usually, a week’s pay is calculated by reference to a 12-week period and, in some cases, the calculation can exclude payments like bonuses, commission and overtime.

It is also not clear whether employers will be required to cover the excess 20% of the furloughed worker’s salary.

D. Other employment rights

Other employment rights of furloughed workers may also be compromised as a result of being designated furloughed; for instance, some employment rights are dependent on the length of time a person has worked for their employer, and where, for example, there is a week period where there is no employment contract, the continuity of employment may break.

There is also uncertainty as to whether a furloughed worker would have to drop down to the lower rate of statutory sick pay if they fall ill or have to self-isolate.

E. Application process for CJRS

All UK-wide employers with a PAYE scheme are eligible for CJRS, including employers in the public sector, Local Authorities and charities.

Eligibility criteria

  Step   Eligibility  
1. The employer must:

a. designate affected employees as “furloughed workers”;

b. notify the employee of this change; and

c. review the relevant employment agreement to ascertain what procedures and/or negotiations are required pursuant to the change in status.
2. Once the new CJRS portal is live, the employer must submit information to HMRC about the employees:

a. that they have been declared “furloughed workers”; and

b. their earnings.

F. Additional requirements

It should be noted that in regards to step 2, and upon the CJRS portal going live, HMRC may set out further details on the information required, as well as any other additional requirements.

4. Coronavirus Self-employment Income Support Scheme

A. Introduction

On 26th March 2020, the UK Government announced the Coronavirus Self-employment Income Support Scheme (CSES) to help assist those persons who are self-employed.

The scheme offers a taxable grant up to 80% of profits of the self-employed person and/or partnership, up to a maximum of £2,500 per month. Initially, the taxable grant will be available for three months in one single lump-sum payment, with payments expected to start from the beginning of June.

B. Persons who are covered

A person who claims for CSES (“claimant”) must earn more than half of their income from self-employment.

Moreover, the CSES is available only to those with a trading profit of less than £50,000 in the year 2018-2019, or an average trading profit of less than £50,000 from 2016-2017, 2017-2018 and 2018-2019. “Trading profit” has not been formally defined, but we expect it to mean the outstanding amount received after the total yearly revenue generated has been used to cover operating costs.

Importantly, those who are (a) recently self-employed; and (b) do not have a full year of accounts will not receive any help under CSES. Furthermore, those who pay themselves a salary and dividends through their own company are not covered by CSES; rather, they will be covered by the Coronavirus Job Retention Scheme if the company operates through PAYE (see above).

C. Application process

The application process is as follows:

  1. HMRC will use existing information to identify those claimants eligible and will invite applications;
  2. the applications will require the claimants to confirm that they meet the eligibility criteria;
  3. the CSES amount will be paid straight into the claimant’s bank account, which claimants will need to confirm on their application forms; and
  4. importantly, claimants need not contact HRMC now, as if they are eligible they will be contacted by HRMC directly.

Eligibility criteria

  Step   A. Eligibility  
1. Claimant must receive more than half of its income from self-employment.
2. Claimant must have a trading profit of either: 

a. less than £50,000 in the year 2018-2019; or

b. an average trading profit of less than £50,000 from 2016-2017, 2017-2018 and 2018-2019.
3. If the claimant is eligible, the claimant will be directly contacted by HMRC in due course.
    B. Exclusions  
1. Claimants who are (a) recently self-employed, and (b) do not have a full year of accounts are excluded from CSES.
2. Claimants who pay themselves salary and dividends from their own companies are excluded from CSES, but may benefit from CJRS (see above).

5. Government amendments to insolvency laws during the COVID-19 outbreak

A. Introduction

Business Secretary Alok Sharma announced changes to UK insolvency laws on 28th March 2020 in order to protect businesses that are struggling as a result of the recent Covid-19 outbreak. These changes include –

  1. a moratorium for companies to prevent creditors from enforcing their debts for a period of time whilst the companies seek a rescue or restructure (“Moratorium”);
  2. protection of the companies’ supplies to enable them to continue trading during the Moratorium; and
  3. a new restructuring plan which would bind creditors to that plan.

In particular, and importantly, Sharma has also temporarily suspended wrongful trading provisions with retrospective effect from 1 March 2020 for a period 3 months. This will allow company directors to keep their businesses going without the threat of personal liability, whilst also making use of the government support packages that have been announced over the last few weeks.

However, the government has hitherto not announced the date on which these changes to the insolvency rules will be enacted, but have confirmed that the effect will be retrospective from 1 March 2020.

B. Moratorium

The government has stated in regards to the proposed changes (“Proposed Changes”)[1]: “The government previously consulted on changes to the corporate insolvency regime and announced plans to introduce new insolvency restructuring procedures in August 2018 (“Restructuring Procedures 2018”)[2]. The new legislation will implement these plans, including a short moratorium or ‘breathing space’ that will give companies in difficulty time to explore options for rescue.”

Although the Proposed Changes have not yet been implemented, under the Restructuring Procedures 2018, the Moratorium would be available to all companies[3], provided that the company meets certain eligibility criteria and qualifying conditions. Once commenced, the moratorium may last up to three months with the possibility of being extended beyond that period. During the Moratorium, the directors would maintain their control of the company, and creditors’ interests would be protected through an authorised supervisor, who would monitor the company’s compliance with those qualifying conditions in the Moratorium. Therefore, once introduced the Moratorium will have similar practical effects to an administration moratorium.

Moreover, the Proposed Changes state that the Moratorium will also allow companies to have access to their supplies and raw material to enable them to continue trading.

However, it has not been formally announced how the Moratorium would be filed, as the Restructuring Procedures 2018 states: “[T]he Government therefore intends that entry into a moratorium will be triggered by filing the necessary papers at court. This will resemble the current procedure for an out of court appointment of an administrator.” However, the courts have recently announced that they would be accepting e-filings due to the lockdown restrictions imposed across the UK, and the City of London Lawyers suggested to the UK Government that the e-filing system should be permissible to file the Moratorium application in light of the lockdown restrictions.[4]

Lastly, the Restructuring Procedures 2018 states that the government will deter abuse by dishonest or reckless directors during the Moratorium by introducing sanctions used in the existing small company moratorium in creditors’ voluntary arrangements (e.g. paragraph 16, Schedule A1 IA1986); whether this will be upheld by the UK Government remains to be seen.

C. Wrongful trading

The laws on wrongful trading are governed by section 214 and section 246ZB of the Insolvency Act 1986 (“IA1986”). Importantly, the laws state that once a director or directors conclude (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or insolvent administration, the director(s) have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors. This has the effect of shifting the directors’ duties from the company to the company’s creditors.

In light of the Covid19 outbreak, this provision has created a lot of fear and hesitation among directors whose companies have been adversely affected and, in particular, have experienced such a loss to the extent that the directors are not in a position to make a solvency statement. Under the wrongful trading rules, any director who becomes aware of the company’s actual or potential insolvency and continues to trade regardless would be personally liable and risk criminal conviction.

Therefore, in order to protect companies and their directors, the UK Government has temporarily suspended section 214 and section 246ZB IA1986. This will allow directors to continue the company’s trading activities while avoiding criminal conviction. Moreover, and upon its introduction, with the use of the Moratorium, the company will be able to avoid any creditor’s action against the company, adding an extra layer of protection to the directors.

D. Additional requirements

The Proposed Changes are yet to be enacted by the UK Government, and we will continue to closely monitor any further changes and/or announcements made by the UK Government in this area of insolvency law.

6. UK Partners’ Contact Details

Nick Foster
(Head of Corporate and Commercial)  
+44 (0)20 3874 2998
nick.foster@wordleylaw.com
  Paul Wordley   +44 (0)20 3874 2994
paul.wordley@wordleylaw.com
  Graham Denny   +44 (0)20 3874 2993
graham.denny@wordleylaw.com
  Alison Proctor   +44 (0)20 3874 2992
alison.proctor@wordleylaw.com

[1] GOV.UK: “Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19” accessed: https://www.gov.uk/government/news/regulations-temporarily-suspended-to-fast-track-supplies-of-ppe-to-nhs-staff-and-protect-companies-hit-by-covid-19 published 28 March 2020

[2] Department for Business, Energy & Industrial Strategy, “Insolvency and Corporate Governance – Government Response 26th August 2018” accessed online: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/736163/ICG_-_Government_response_doc_-_24_Aug_clean_version__with_Minister_s_photo_and_signature__AC.pdf

[3] The Restructuring Procedures 2018 states that the UK Government’s intention is to exclude companies falling within the scope of the exceptions listed in paragraphs 4A to 4J of Schedule 1 of the Insolvency Act 1986 from the Moratorium; however, in light of the Covid19 Outbreak, there has not been a formal announcements as to whether this intention will be enacted.

[4] City Solicitors, “Proposals For Mitigating The Short Term Effects On Viable Businesses Of Covid-19” published 26th March 2020, accessed online: http://www.citysolicitors.org.uk/storage/2020/03/CLSL-Insolvency-Law-Committee-Paper-mitigating-the-effects-of-Covid-19-002-1.pdf