On 28 March 2020 the Business Secretary announced that government is accelerating planned reforms of UK insolvency law, to give struggling companies more chance of survival. He also announced legislation to temporarily give companies greater flexibility to postpone their AGMs or hold them online.
Planned insolvency reforms include:
- a new moratorium period for financially distressed companies, during which time directors remain in control and creditors cannot take action against them
- a new restructuring procedure, which would allow a company to bind all creditors, including junior classes of creditors, even if they vote against the plan
- the prohibition of ‘termination clauses’ in business supply contracts, whereby suppliers terminate supply contracts on the grounds that their customer has entered a formal insolvency procedure - this is intended as a means of enabling businesses in distress to trade out of their difficulties
The Business Secretary also announced a temporary relaxation of wrongful trading rules so directors have more scope to act to save businesses in these exceptional circumstances.
We believe it is essential that government takes steps to ensure co-operative and community benefit societies are included in these measures. If you agree, please add your society as a signatory to this joint letter, which we will send to the HM Treasury Minister responsible for society law at 4 pm on Monday 6 April.
Including societies in insolvency reforms and AGM flexibility
This is a joint letter from the undersigned co-operative and community benefit societies, asking government to ensure our corporate forms are included in the insolvency reforms and Annual General Meeting (AGM) measures, announced by the Business Secretary on 28 March 2020.
In order to comply with government's social distancing requirements, societies may need to breach their own rules regarding AGMs. While the Financial Conduct Authority has indicated that societies will be given a degree of leeway where such breaches occur, there is still the risk that members can take action against a society following such breaches. Thus the degree of clarity and certainty government intends to provide for companies on this matter would be of great help to societies as well.
Early evidence suggests that between 30 and 50 per cent of societies are already experiencing significant financial and operational stresses as a result of COVID-19, with this number set to increase. The insolvency measures just announced for companies, such as the moratorium period, would, if made available, increase the chances that societies in financial distress survive.
Beyond the immediate urgency of COVID-19, we believe there are significant risks in creating further disparities between societies and companies in this crucial area. This includes an increased risk of society failure relative to companies, which could be very costly in areas such as credit scoring. Ultimately, more societies would fail as a result of not having recourse to these new measures, costing livelihoods and in many cases destroying enormous social and economic value.
We also believe some aspects of the planned reforms would need to be modified to suit the distinct form and function of societies.
Prior to the COVID-19 outbreak, Co-operatives UK was in discussion with HM Treasury officials about including societies in these insolvency reforms. Some detailed work has already been done to consult experts in the sector, develop the case for action and identify possible modifications to planned reforms to ensure they are appropriate for societies.
Please take action so that societies are given as many chances as companies are to make it through this most challenging time.
Co-operative and community benefit societies
Find out more and give your views
Co-operatives UK was working with government on insolvency reforms before the COVID-19 outbreak. We had planned to consult our members. While things are now moving very fast, we would still like to offer members the opportunity to have a say. Please respond to our consultation by Monday 6 April 2020.