Practical Guidance Note #6

Changes to Insolvency Law measures designed to support businesses affected by COVID-19

Late last week Business Secretary Alok Sharma announced new measures designed to improve the insolvency system to help businesses get through the Covid-19 outbreak.

The purpose of these measures is to temporarily suspend wrongful trading provisions retrospectively from 1 March 2020 for three months to enable UK companies that are undergoing a rescue or restructuring to continue trading, giving them the breathing space they need to avoid insolvency whilst also ensuring any creditors will get the best possible return in these difficult circumstances.

1st April 2020

The new insolvency law changes include:
  • A moratorium for businesses giving them some breathing space from creditors enforcing their debts for a short period of time while they seek a rescue or restructure
  • Protection of their supplies to enable them to continue trading during the moratorium
  • A new restructuring plan, which will be binding for creditors
  • the new proposals include key safeguards for creditors and suppliers to ensure they are paid while a solution is sought
  • The temporary suspension of wrongful trading provisions will give company directors greater confidence to continue trading through the coronavirus crisis, without the threat of personal liability hanging over them should the company ultimately fail.

The temporary suspension of wrongful trading provisions, coupled with the introduction of these additional measures, should provide some respite for what would be otherwise regarded as viable businesses seeking to access the government’s support package to weather this crisis. That said, it’s important for company directors to note that existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct, as Alok Sharma reiterated that ‘all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force.’

Our Corporate Finance specialist Mark Neath commented:

‘I think for many private company directors, this will sound like a technical change to a rule they were perhaps only aware of in passing. 

So what does it actually mean for them and their businesses?  ‘Wrongful trading’ is a part of insolvency law to protect creditors.  It places an obligation on directors, who when they should reasonably conclude that the company has no realistic prospect of avoiding insolvent administration, to take all reasonable steps to mitigate losses to creditors.  It has always been a risk that directors trying their best to do the right thing, or believing they could trade-out of the situation, can inadvertently fall foul of these rules.  The suspension of these rules during the current crisis is no doubt intended to encourage directors to try to seek out pragmatic solutions to keep businesses going and to give them some breathing space to put new finance in place, for example.’

We would always encourage directors, wherever they think there is a risk that insolvency may follow, to take appropriate professional advice from a licenced Insolvency Practitioner.