Covid-19 and insolvency: new reforms announced”

First Published 31.03.2020 at 17:20.

Wrongful trading

Under UK insolvency law, a company may be wrongfully trading if:

  • It continues to trade when its directors are aware that it is unable to pay its debts as they fall due; and
  • The company ultimately falls into insolvent liquidation.

This could result in personal liability for the directors.

Due to the current crisis, many companies which would otherwise be viable are likely to find themselves in a position which, under the present rules, would be wrongful trading. However, if the directors are forced to shut down those companies simply to avoid personal liability, this could result in the loss of normally solid businesses and long-term damage to the economy.

The government has therefore announced that personal liability for directors for wrongful trading will be suspended, to allow companies to continue to trade during the pandemic.  The legislation to enact this suspension has yet to be passed, but it will apply retrospectively from 1 March 2020 for a period of three months.

Rules relating to fraudulent trading and disqualification of directors are unaffected, in order to ensure that misconduct by directors remains subject to sanction.

Changes to corporate insolvency laws

In 2018, the government carried out a review of UK insolvency laws. A number of proposals was suggested, but the government concentrated on other priorities and those proposals have never been enacted. The government is now planning to resurrect the process and put in place some of the reforms. New restructuring tools will be introduced, including:

  • a moratorium for indebted companies to protect them against creditors enforcing their debts for a certain period, while the company seeks a rescue or restructure;
  • protection of supplies to enable companies to continue trading while under the moratorium;
  • a new form of restructuring plan, which will be binding on creditors;
  • safeguards for creditors and suppliers to ensure they are paid while a solution is sought.

Further news will follow when the government proposals are more clear.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.