COVID-19 and Insolvency new rules

What are the insolvency measures, in place, during lockdown?

Following from the UK Government’s announcements that they will provide financial assistance to businesses that are facing collapse, it seems that a number of business have acknowledged that such assistance is either going to be far off the mark to help them or simply too late We have already seen in the headlines that Virgin Atlantic are hoping for a government bailout of £500m and the restaurant chain Carluccio’s has gone into administration.

It is inevitable that a large number of insolvencies are going to take place as a result of financial strain during this unprecedented crisis. The UK Government have seemingly acknowledged this and have announced changes to the insolvency regulations during the COVID-19 pandemic. The changes will enable business undergoing a rescue or restructure process to continue trading with the hope that this gives them some relief or breathing space.

In 2018 the UK Government reviewed changes to the insolvency regime and suggested it was to introduce new insolvency restructuring procedures. As a result of the COVID-19 pandemic it is understood that the Government will implement the new legislation along with these plans that include a short suspension that will allow companies in difficulty some time to consider rescue options.

Director’s fears of personal liabilities through wrongful trading

What if you want to rescue your business , which is on the brink of insolvency, but perhaps a few months and passing the pandemic you can recover? However, you have a duty to disclose potential insolvency issues with your creditors otherwise face potentially personal liabilities and sanctions.

It will also enable business to maintain purchasing essential supplies such as energy, internet and raw materials, while attempting to rescue their business, while giving a temporarily suspension ofaction for wrongful trading. The new provisions from 1 March 2020 will be in place for 3 months allowing directors to enable them to keep their business going without the threat of personal liability. Directors must be transparent to their customers and suppliers when facing insolvency , but if they are attempting to rescue their business and need this grace period to restructure and survive they can avoid personal liabilities . It may be that UK laws will be similar to US Chapter 11 bankruptcy rule; this will enable businesses to pay off their debts over time while remaining in business, which hopefully suits all parties in the longer-term. The key tip for businesses is to preserve their relationships where they can by being transparent and communicating.

The Insolvency Act 1986, bounds the board of directors to announce a cessation of trading if the company is insolvent (or if insolvency cannot be avoided in the near future). Under the current law, if a director concludes or should have concluded that they are not able to meet the company debts and there is no reasonable prospect of the company avoiding insolvency, they have the duty to minimise loss to the company’s creditors. Should the company go into insolvent liquidation or administration and the Court takes the view that the director(s) failed in their duty then they can be held personally liable and may be ordered to contribute to the company’s assets.It is these rules they are proposing to suspend, but mis-use will be scrutinised.

The Institute of Directors had already been requesting a suspension of the offence of wrongful trading on the grounds that directors were reluctant to take certain actions to preserve the business collapsing. Perhaps the temporary suspension of “wrongful trading” insolvency provisions will help to prevent business collapse for those which could reasonably be avoided.

The UK Government’s announcement on 28 March regarding the suspension (temporarily) of wrongful trading rules did not provide a time period for such suspension. It is thought that this suspension will give directors some confidence to make decision about the future viability of the business without being unduly influenced by the impact of COVID-19 which our outside of their control. A further consideration is that it may give them more time to explore whether there are any funding options available to them from a bank or the Government.

Fraudulent trading or mis-use of the provisions

The laws relating to fraudulent trading and director disqualification remain in place and it remains an offence to carry on a business with the intent to defraud creditors. It is also worth pointing out that a blanket suspension could risk abuse and such provisions were in place to protect creditors. Instead those directors who are worried about the consequences of continuing to trade during the COVID-19 disruption should seek advice from an insolvency practitioner or insolvency lawyer as they could assist in removing the risk of facing wrongful trading action.

With regards to timescales, whilst it was announced the new legislation to introduce the suspension of wrongful trading will be implemented at the earliest opportunity, there are no exact dates yet proposed.
Separately, the 2018 review also considered a preliminary moratorium for solvent companies to allow them time to consider restricting and options for rescue. During the moratorium the company would still required to pay its debts as they fall due. The moratorium would benefit those companies that would go insolvent if no action was taken and is not yet insolvent and is carrying on in business. The business also must instruct a licensed insolvency practitioner who will consider whether, on the balance of probabilities, that there is prospect of coming to an agreement with the creditors. Whilst this may not be of use to already insolvent companies it will benefit those who remain solvent and need more time to consider their options.

By the announcement of Business Secretary Alok Sharma on 28 March 2020 it is intended to improve the insolvency measures to help those businesses hit by the COVID-19 crisis. Mr Sharma said the changes to insolvency rules allow firms “greater flexibility as they face the current crisis” the thought being that when this passes, business have weathered the storm and are ready to bounce back.

We are restructuring , helping clients preserve their relationships , integrate business resilience plans and embracing commercial opportunities ; we are re-negotiating terms, auditing and varying contracts ; and doing all we can to keep our client businesses operational and in the driving seat. If you need advice we can offer fixed fee packages , ad hoc advice and even in-house counsel services to support you spreading costs out as best we can