www.bhspecialty.com
www.rpc.co.uk
COVID-19 AND THE IMPACT
ON UK CORPORATE INSOLVENCIES
INTRODUCTION
It has been just over two years since the World Health
Organisaon rst declared Covid-19 a pandemic, and
as the UK prepares to transion away from an era of
pandemic restricons and unprecedented government
intervenon, to a more ‘business-as-usual’ open
economy, it seems mely to consider the possible
legacies of this crisis on UK businesses. In doing so, we
look to consider:
1. How the impacts of Covid-19 may dier from
prior recessionary periods;
2. Whether the downturn will result in a period of
heightened corporate insolvencies, and;
3. Whether the government measures discussed in
this arcle, and the scale of the economic shock
experienced by the UK economy (and many
others), will lead to emerging risks and liability
exposures to which company directors (and the
providers of directors and ocers insurance)
should take heed.
To begin to address these quesons, we should rst
remind ourselves of the scale of the COVID-19 impact
over the last two years.
ECONOMIC IMPACT OF THE PANDEMIC
AND GOVERNMENT RESPONSE
The size of the economic shock caused by the pandemic,
and in parcular the impact of the Government
mandated closure of large swathes of the economy, was
huge. The Oce for Naonal Stascs records a drop in
GDP of 9.4% in 2020, comparing with a 4.2% drop in the
fall out of the Global Financial Crisis in 2008. This impact
required the Government to provide an unparalleled
level of smulus and support to the economy. At its
height, under these arrangements, the Government
assumed responsibility for paying the wages of nearly
9 million workers under the Coronavirus Job Retenon
Scheme at a taxpayer cost of c. £70 billion.
1
In addion, under the Bounce Back Loan, Coronavirus
Business Interrupon Loan and Coronavirus Large
Business Interrupon Loan Schemes approximately £79
billion of liquidity
2
was advanced to businesses impacted
by the pandemic, much of which was guaranteed by the
Government.
LEGISLATIVE INTERVENTIONS
In addion to these employee protecon and scal
measures, sweeping legislave intervenons were
introduced under the Corporate Insolvency and
Governance Act 2020 (CIGA) and the Coronavirus Act
2020. Under these emergency legislave arrangements,
several permanent new insolvency and restructuring
regimes were introduced to the UK statute books, and
temporary measures imposed, including the suspension
of director liability for wrongful trading.
(We discuss, further, the nature and scope of these
legislave reforms in the appendix to this arcle.)
Immediately prior to the pandemic, stascs published
by the Insolvency Service for Q4 2019
3
reveal that
corporate insolvencies increased to their highest annual
level since 2013. Furthermore, as illustrated in the
below Insolvency Service graph, the Q4 2019 corporate
insolvency stascs form part of a wider trend under
which the number of corporate insolvencies had been
trending upwards since 2015.
1
hps://www.gov.uk/government/stascs/coronavirus-job-retenon-scheme-stascs-4-november-2021/coronavirus-job-retenon-scheme-stascs-4-november-2021
2
hps://www.gov.uk/government/collecons/hm-treasury-coronavirus-covid-19-business-loan-scheme-stascs
3
hps://assets.publishing.service.gov.uk/government/uploads/system/uploads/aachment_data/le/861187/Commentary_-_Company_Insolvency_Stascs_Q4_2019.pdf
With an experienced global claims team and a large, stable
balance sheet, BHSI has the ways and the means to help
customers successfully navigate even the most complex claims.
We also have a commitment to claims excellence, and to doing
the very best for each customer – so they can face down the
worst days with confidence and peace of mind.
Claim on.
www.bhspecialty.com
A review of the data from the UK Insolvency Service,
through the course of the pandemic, shows the total
number of company insolvencies registered in 2021 was
14,048, which was around 11% higher than the 12,634
in 2020, but remained below pre-pandemic levels.
However, what may be a more indicave stasc of
what to expect in 2022 is considering how the frequency
of company insolvency registraon has both evolved
over the course of 2021 and how it ended in December
2021, compared to pre-pandemic levels.
Here, the number of company insolvencies in December
2021 was 33% higher than in the pre-pandemic
comparison month (December 2019) and has been
trending upwards over the course of 2021. Furthermore,
this negave trend can be ancipated to connue
through 2022, as evidenced by the latest February 2022
UK Insolvency stascs, which show the number of
company insolvencies in February 2022 were more than
double February 2021, and 13% higher than February
2020, pre pandemic. All of which are sll before
government support fully wanes and the eects of a
recongured economy begin to bite.
All of which leads us to the last of our three quesons,
and a gaze into the crystal ball.
LOOKING AHEAD: DIRECTOR LIABILITY
LANDSCAPE IN 2022
The reforms introduced under CIGA and the Coronavirus
Act 2020 provided heightened levels of protecons
to companies and directors, largely at the expense
of creditors’ rights. For example, the Government’s
temporary suspension under CIGA of liability for
wrongful trading during the height of the pandemic
means that insolvency praconers will be denied an
important ground for challenging directors’ conduct,
and with the hope that an introducon of two new
permanent restructuring regimes could, in the long-
term, result in less insolvencies overall, as viable
companies are provided with alternave opons
through which to restructure.
Whilst these reforms have aorded some increased
protecons to directors, there are other areas of
insolvency related risks, beyond wrongful trading
liabilies, where protecon has not been enhanced.
And any adverse impact from Covid-19 on businesses
may result in directors facing increased exposure for
those addional risks, for example heightened scruny
on their authorisaon of transacons entered into by
companies in the period prior to any insolvency, as well
as claims for misfeasance and breach of duciary dues.
Although untested, it is possible that when assessing
directors’ conduct during the pandemic, the courts may
take some account of the unprecedented challenges
faced by directors at a me when the outcome of the
pandemic for wide secons of the UK economy was
unknown and survival was by no means certain. In these
circumstances, except in the most-clear cut cases, it
may be harder for claimants to successfully prosecute
claims. However, due to the lag between the occurrence
of potenally aconable events, a company entering
insolvency proceedings (which itself may be delayed
due to COVID-related Government intervenons), an
insolvency praconer conducng enquiries and nally
a claim being brought it may be some me before the
courts’ approach to these maers becomes apparent.
In addion, the Government’s key temporary statutory
protecons have since expired on 31 March 2022. The
relaxaon of these protecons may result in a sharp
upck in the number of corporate insolvencies, as the
pent-up demand of frustrated creditors is released
and the viability of businesses post-pandemic will be
tested and exposed, without the benet of Government
support. These factors, together with the prospect of
further interest rate increases to stave o inaon, the
challenges arising from Brexit, increasingly problemac
supply chain challenges and employee shortages
(exacerbated by the recent war in Ukraine), have led
some praconers to warn that UK businesses are sll
a long way from returning to prosperity and growth and
that the most challenging mes for many corporates
and their directors lie ahead. This pping point in Supply
Chain challenges has been vocalised by a number of UK
industry bodies, with MakeUK, the UK Manufacturing
body, warning prices are becoming unmanageable for
some manufacturers. “While the pot may not be at the
boiling point it has been over the last year, logiscs costs
remain a big part of the high cost temperature that
businesses face,” said Verity Davidge, director of policy
at MakeUK, adding it was dicult to predict when the
costs and disrupon would be resolved.
WHERE DOES D&O INSURANCE
(AND BHSI) FIT IN?
The environment described in the preceding secon
involves a level of uncertainty, and potenally increased
risk, which may well give cause for concern for directors.
Of course, one of the main protecons available to
company directors and execuve ocers is provided
under directors’ and ocers’ liability insurance. And
the engagement of D&O insurance policies oen
arises when companies enter insolvency. This is
because insolvency praconers have a statutory
duty to invesgate the circumstances leading up to
the insolvency of a company, including examining the
conduct of the directors and transacons entered into in
the period prior to insolvency.
BHSI is acve in providing capacity to nancially
distressed companies, as evidenced by the specic
soluons we provided for a number of our customers
who ulised the UK government’s new restructuring
plan. We have a market leading management liability
porolio in London, with a team of underwriters and
claims handlers experienced in handling these complex
and evolving exposures. And equally important, a claims
oering that provides certainty and support when a
customer most needs it, all supported by a plaorm
with a long-term focus on providing sustainable and
consistent soluons for our customers, with the
backing of the Berkshire Hathaway Specialty Insurance’s
unmatched nancial strength.
FINANCIAL STRENGTH &
COMMITMENT
BHSI offers our customers a wide range of
coverages on a worldwide basis, all backed
by BHSI’s market commitment, underwriting
and claims expertise and financial strength.
Berkshire Hathaway’s National Indemnity group of
insurance companies hold financial strength ratings of
A++ from AM Best and AA+ from Standard & Poor’s
with $411.6 billion in total admitted assets and $250.6
billion in policyholder surplus*.
* Source: Balance sheets as of 30/09/2021 for the Berkshire Hathaway
National Indemnity group of insurance companies.
APPENDIX
WINDING-UP PETITIONS AND
WRONGFUL TRADING
The reforms introduced under CIGA and the Coronavirus
Act 2020 provided unprecedented levels of protecons
to companies and directors, largely at the expense of
creditors’ rights. Under CIGA creditors were inially
prohibited from presenng a winding-up peon
against a company based on either: (i) a statutory
demand that was served between 1 March 2020 and 30
September 2021 or (ii) during the same period, based
on a company’s inability to pay its debts (including rent),
unless the creditor has reasonable grounds for believing
COVID-19 has not had a nancial eect on the company,
or that the company’s debt issues would have arisen in
any event.
With eect from 1 October 2021 unl 31 March 2022
certain creditor restricons remained in place. Under
these legacy measures, winding-up peons may not
be made in respect of debts: (i) relang to unpaid rent
or other sums due under a lease of premises used for
business purposes where the debt is unpaid by reason
of a nancial eect of COVID-19; or (ii) of a value of less
than £10,000. In addion, creditors are required to give
21 days’ noce to the debtor of its intenon to present
a winding up peon and invite creditors to make a debt
payment proposal.
Under the wrongful trading provisions contained in the
Insolvency Act 1986, where a director of a company
knows, or ought to conclude that there is no reasonable
prospect that the company will avoid insolvency, they
must take every step that a reasonably diligent person
having the knowledge, skill and experience that may
reasonably be expected of a person carrying out the
director’s funcons, and their own knowledge, skill, and
experience, would take with a view to minimising the
potenal loss to the company’s creditors. If the director
fails to take such steps, and the company becomes
insolvent, then the director may be ordered to make
such contribuon to the company’s assets as the court
considers appropriate. Such contribuons are oen
assessed as equang to the amount that the director’s
acons contributed to the company’s net balance sheet
deciency.
Inially under CIGA, and subsequently extended by
statutory instruments, the Government suspended
liability for wrongful trading between 1 March 2020
to 30 September 2020 and 26 November 2020 to 30
June 2021. These temporary measures brought about
a profound change in the risk prole to directors for
breach of duciary and/or directors’ dues during the
pandemic.
NEW INSOLVENCY REGIMES
In addion to making temporary amendments to
exisng insolvency rules and procedures, CIGA also
introduced permanent new insolvency regimes to
bolster the UK restructuring toolkit. These permanent
reforms included the introducon of the restructuring
plan and a freestanding moratorium procedure.
The restructuring plan develops and extends principles
and procedures of schemes of arrangement under
Part 26 of the Companies Act 2006 with the purpose
of assisng viable companies struggling with debt
obligaons through a court sanconed process that
binds creditors if it is “fair and equitable” and can be
imposed on dissenng creditors under a cross-class
cram down mechanism.
The moratorium procedure is a new “debtor-in-
possession” procedure which provides UK companies
with breathing space in which to pursue a rescue or
restructuring plan. During this moratorium no creditor
acon can be taken against the company without the
court’s permission. The moratorium is overseen by a
monitor (an insolvency praconer) but responsibility
for the day-to-day running of the company remains with
the directors.
BEN BARKER
Head of Execuve and Professional Lines Claims, UK, BHSI
Ben.Barker@bhspecialty.com
Ben Barker is Head of Execuve and Professional Lines claims for Berkshire
Hathaway Specialty Insurance, UK. In nearly 20 years as an insurance professional
Ben has acquired a market leading experse in all Financial Lines products,
managing claims teams dealing with large, complex and high-prole losses across
mulple product lines.
THOMAS HARRIS
Senior Underwriter, Commercial Management Liability, UK, BHSI
Thomas.Harris@bhspecialty.com
Thomas Harris is a Senior Underwriter in the Commercial Management Liability
team for Berkshire Hathaway Specialty Insurance, UK. In nearly 14 years as an
insurance professional, Thomas has worked in both broking and underwring
capacies, acquiring signicant experse in underwring large, complex Directors
& Ocers Liability placements, and the broader Management Liability suite of
products.
PAUL BAGON
Partner, RPC
Paul.Bag[email protected]
Paul Bagon is a partner at internaonal law rm RPC and advises stakeholders in
all aspects of cross-border and domesc insolvencies, nancial restructurings,
corporate turnarounds, group reorganisaons complex workouts and distressed
M&A and nancings. In recent years, Paul has advised boards of directors
of nancially distressed mulnaonal groups and insureds and worked on
restructurings in the retail, leisure, oil and gas and nancial services sectors. He is
a member of the R3 Associaon of Business Recovery Professionals, the Insolvency
Lawyers Associaon and INSOL.
JAMES WICKES
Partner, RPC
James.Wick[email protected]
James Wickes is a partner at internaonal law rm RPC that specialises in advising
insurers and reinsurers in respect of claims under FI, PI, D&O, W&I and Crime /
Fidelity insurance.
James also regularly defends claims against nancial instuons/professionals and
directors & ocers, oen with an oshore or internaonal dimension, including
cross-border disputes.
James has been recognised as a Leading Individual for Insurance and Reinsurance
Ligaon and a Next Generaon Partner for Professional Negligence by The Legal
500 UK (2022). He has also been recognised as a Notable Praconer for Insurance:
Contenous Claims & Reinsurance in Chambers UK (2022).
AUTHORS
04/2022D
In Europe, Berkshire Hathaway Specialty Insurance (BHSI) trades under Berkshire Hathaway European Insurance DAC (BHEI) and Berkshire Hathaway International Insurance Limited (BHIIL). BHEI is an Irish domiciled
Designated Activity Company, Registration Number 636883 and Registered Office at 2nd Floor, 7 Grand Canal Street Lower, Dublin D02 KW81. Berkshire Hathaway International Insurance Limited (BHIIL), an
incorporated England and Wales limited liability company, Registration Number 3230337 and Registered Office at 8 Fenchurch Place, 4th Floor, London EC3M 4AJ, United Kingdom. BHEI and BHIIL are affiliates of
Berkshire Hathaway Specialty Insurance Company (BHSIC), a Nebraska USA domiciled corporation, which provides commercial property, casualty, healthcare professional liability, executive and professional lines,
transactional liability, surety, marine, travel, programs, accident and health, medical stop loss, homeowners, and multinational insurance. BHSIC, BHIIL and BHEI are subsidiaries of Berkshire Hathaway’s National
Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, BHSI has offices in Atlanta, Boston, Chicago, Houston, Indianapolis,
Irvine, Los Angeles, New York, San Francisco, San Ramon, Seattle, Stevens Point, Adelaide, Auckland, Brisbane, Cologne, Dubai, Dublin, Frankfurt, Hong Kong, Kuala Lumpur, London, Macau, Madrid, Manchester,
Melbourne, Munich, Paris, Perth, Singapore, Sydney and Toronto. For more information, contact info@bhspecialty.com.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include
all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions. For the latest Best’s Credit Rating, access www.ambest.com.
