COVID-19 and Government-imposed restrictions are placing an unprecedented strain on everyone and businesses and individuals may be facing extreme financial pressure. COVID-19 is impacting businesses throughout the supply chain in most, if not all, sectors. This may mean that clients and debtors are unable to meet their obligations and there may need to be changes as to how these are dealt with. This note aims to provide some guidance to help Insolvency Practitioners (“IPs”) deal with certain practical issues that may arise in active cases.
How should we deal with cases where debtors of an insolvent estate are unable to pay?
IPs may already have settlement agreements in place with debtors, or may be in the process of negotiating such agreements. Understandably, individuals and corporates who are genuinely struggling as a consequence of COVID-19 restrictions may be unable to continue to contribute to payment plans or reach settlement agreements at this time, in addition there may of course be certain debtors who could pay but try and use COVID-19 as a reason not to pay.
The Insolvency Service has requested IPs give forbearance where possible. Therefore, IPs may choose to allow a payment break or pick up negotiations when the current restrictions are lifted and business is back to usual (or at least approaching usual). However, we would recommend that such a decision is only taken where necessary and detailed reasons are given and recorded. For example, the debtor explaining that they have been furloughed or have lost income due to their sector being shut down. It may also be advisable to ask the debtor to complete an updated statement of means to demonstrate that payment cannot be made at this time.
IPs should carefully consider whether the COVID-19 crisis can justify accepting a decreased payment amount. Whilst a delay in receiving and/or chasing this payment may be acceptable, IPs should ensure that stakeholder interests are not prejudiced. Ordinarily, we would expect that this means accepting a delay only, but IPs should reach a well-reasoned conclusion based on individual circumstances.
We’re supervising a voluntary arrangement and our client will struggle to meet contributions in line with terms of the voluntary arrangement. Are we able to help them?
The impact of COVID-19 is being felt by companies and individuals alike and clients may be facing liquidity issues and experiencing difficulty in keeping up with the payment terms of the voluntary arrangement. Engagement is key and IPs should ensure that discussions are had with clients to assess the extent of the impact of COVID-19 on their finances and work to reach a solution.
IPs should first look to the terms of the voluntary arrangement and check whether the arrangement allows for supervisor discretion. Where discretion is permitted, the ICAEW and IPA joint statement envisages that IP’s discretion will necessarily be wide in the current circumstances. When deciding whether and to what extent to exercise this discretion, IPs should act pragmatically and keep a clear record of decisions made. The rationale behind such decisions should be clearly documented and IPs should ensure that they have followed ethical principles and have justifiable, sound reasons for reaching their decisions.
In addition, HMRC has published guidance, setting out its approach to voluntary arrangements in the current climate. HMRC will support a three-month break from contributions from clients impacted by COVID-19 and there is no need to contact HMRC to request this. Moreover, if a company or individual defers VAT or other taxes in line with Government guidance, HMRC has confirmed that it will not treat any deferral of VAT as a breach of terms of an arrangements requiring payment of VAT as it falls due. However, where there are previous, serious non-payments of VAT, this may still need to be dealt with in accordance with the terms of the arrangement and HMRC will be in contact where this is the case. Due to the current pressures on HMRC, this may not be for some time, so supervisors should be aware that certain contributions may still need to be made for some arrangements.
We’re running an accelerated sales process and/or a trading insolvency and are hoping to sell the business and/or assets. Can we wait for asset value to recover before selling? Do we still need to obtain a valuation?
COVID-19 has caused dramatic changes in markets and decreased the pool of prospective purchasers, as businesses are tightening their belts and decreasing cash outlay and may be less inclined to invest or spend unnecessarily. When selling assets impacted by markets, it would not be a breach of the Professional Competence and Due Care ethical principle to allow reasonable time for market recovery before selling.
IPs should still obtain valuations, where appropriate and the Royal Institute of Chartered Surveyors (“RICS”) has published guidance for valuers to follow when conducting valuations. The guidance recognises that inspecting property may be difficult and accessing evidential data could also present challenges. RICS members are encouraged to act in a transparent and professional manner and agree any changes to the way the valuation is conducted. Members are advised to make detailed file notes to support the rationale that underpinned such changes and we would recommend that IPs are aware of this rationale and also include such a record for their file.
Due to remote working, we’re going to find it difficult to process and send out documents to Companies House. Are we able to e-file?
Companies House will now accept the filing of statutory insolvency documents by emailed PDF attachments. The forms should be completed as normal and emailed to Liquidation_EW@companieshouse.gov.uk. You should:
- Enter the company name and number in the email subject line;
- Use digital signatures on the forms, if preferred;
- Only attach a document or a package of documents for one company to each email. Emails containing documents for more than one company will be returned; and
- Only use this service for Insolvency Act filings (unless certain Companies Act filings are submitted as part of a package of documents, e.g. a form AD01 notifying of a change of registered office address).
This is only a temporary solution and Companies House are working on a direct upload system for IPs, so bear in mind that this may change in the near future.
Are there any relaxations of the deadlines for MVL processes?
It is clear that the current climate may lead to difficulties getting the receipts and payments for MVLs, so ICAEW and IPA have announced some measures relaxing the statutory deadlines.
Firstly, there is a relaxation of the requirement for existing MVLs that will be paid in full within 12 months, provided that the IP continues to be of the view that the company will be solvent in the medium term when markets have recovered. In addition, if an IP is considering whether to move the MVL into CVL, they may take longer than the 7 day deadline to notify creditors that the company is unable to pay debts in full within 12 months. Finally, if a Notice of Intended Dividend has already been issued, it is permissible to postpone the dividend and accepted that the payment may be unable to be made within two months of the notice.
Creditors have requested a physical meeting. Do we have to convene a meeting in the current climate?
Government guidance on social distancing requires people to stay at home, except for in very limited circumstances. These measures must be followed by everyone and a physical meeting would not be compliant with these guidelines.
The ICAEW and IPA joint statement makes it clear that virtual meetings will suffice where physical meetings are required, in order to avoid breaching social distancing requirements. The statement calls for a “reasonable approach” to handling creditor requests for physical meetings. There is no further guidance on what constitutes a “reasonable approach”, but we would recommend that a standard response is produced, highlighting Government guidance and referring to the joint statement and that appropriate infrastructure is put in place to enable virtual meetings to be held remotely. As with all issues during this crisis, IPs should act pragmatically and ensure that communication with creditors is clear, responsive and as open as possible.