COVID-19: Changes to the UK insolvency framework
With directors facing mounting pressure to act in accordance with their duties whilst keeping businesses afloat during the coronavirus pandemic, the UK Government has announced temporary changes to the UK insolvency framework. The aim of these changes is to help directors to be able to act in accordance with their duties and to help companies to steer through difficulties and avoid insolvency during the pandemic. The Secretary of State for Business announced these changes on Saturday (28 March 2020). They include:
- a moratorium for companies, giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
- protection from being cut off from essential supplies (like energy and broadband) to enable businesses to continue trading during the moratorium;
- a new restructuring plan, binding creditors to that plan; and
- a temporary suspension of the rules on wrongful trading provisions, to give directors greater confidence to use their best endeavours to continue to trade during the pandemic, without the threat of personal liability should the company ultimately fall into insolvency.
The proposals will include key safeguards for payment of creditors and suppliers while a company pursues a restructuring solution. Other existing laws bringing about personal liability for directors and the threat of director disqualification will remain in force. It’s therefore vital that, notwithstanding the relaxation of the rules, directors continue to take advice on potential liability (as well as on new options that may be open to them because of the changes).
Legislative timing and detail not yet clear
The changes have not yet come into force. Emergency legislation bringing the changes in will pass shortly. The Secretary of State said, “These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends whilst ensuring that creditors get the best return possible in the circumstances.” We await full detail of the new measures.
Whilst we await the detail, here is a recap on the rules on wrongful trading. If the directors continue to trade when they know or ought to know that there is no reasonable prospect that the company will avoid entering insolvent administration or liquidation, they run the risk of being held personally liable to the extent that losses to the creditors increase as a result of trading beyond the point of no return. In such circumstances, the company should only continue to trade for as long as there remains a reasonable prospect of the company avoiding insolvent administration or liquidation. Once directors reach (or ought to have reached) this conclusion, they must take every step to minimise the potential loss to creditors. This will often mean formally ceasing trading and placing the company into administration or liquidation.
In the past weeks, directors have faced unprecedented decision making in weighing up the prospects of being able to avoid insolvency in such uncertainty, deciding whether to continue trading and potentially facing personal liability for wrongful trading.
Suspension of wrongful trading rules
The temporary measures announced at the weekend will retrospectively remove the sanction of personal liability of directors, backdated to 1 March 2020 and lasting for a period of 3 months. The intention is to give directors breathing space during this unsettled period to continue to incur liabilities to the company’s suppliers and employees and to access Government or bank funding, even if they fear the company is heading towards insolvency.
Conclusion and further advice
These new measures are a further positive step by the UK Government to help anchor British businesses during this turbulent period and give company directors some flexibility in trying to navigate their business through the crisis. In particular, suspending wrongful trading will help directors in accessing Government or bank funding without concerns regarding personal liability.
However, the suspension of the wrongful trading rules will not relax any of the other legal duties incumbent on directors. It’s therefore vital that, notwithstanding the relaxation of the rules, directors continue to take advice on potential liability (as well as on new options that may be open to them because of the changes).
We will update Burness Paull’s COVID-19 hub once there is an announcement on the detail of the new measures. Please do get in touch for any further information and advice.
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