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Coronavirus - Insolvency changes

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Please note this blog has been updated by our more recent blog, which can be found here.

On Saturday 28 March 2020 the Business Secretary, Alok Sharma, announced a range of interim relief that will become available for companies who, during the Covid-19 pandemic, face the difficult task of having to balance survival against the longer-term interests of stakeholders.

Suspension of wrongful trading provisions

The main announcement by the Business Secretary was the suspension of the wrongful trading regime with retrospective effect from 1 March 2020. Wrongful trading is where directors assume personal liability for the company’s debt when they continue to trade, even though there is no reasonable prospect of avoiding insolvency.

The suspension of the wrongful trading regime gives directors the opportunity to assess the ever-changing measures that are being implemented by the Government and (for now) continue to trade despite the financial impact that the Covid-19 pandemic is having. As the Business Secretary said, it will allow companies “greater flexibility as they face the current crisis” and “emerge intact the other side of the Covid-19 pandemic”.

However, the suspension of the wrongful trading regime does not give directors free reign to do whatever they so wish. Directors are still required to act with due care, diligence and in accordance with their directors’ duties as contained within the Companies Act 2006. As the Business Secretary stated: “to be clear, all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force.”

Accordingly, the Government has not announced any change to the laws relating to directors’ disqualification or fraudulent trading. Those laws can be summarised as:

  1. Director’s disqualification – a director can be disqualified if their conduct is unfit. One of the factors in determining whether a director’s conduct is “unfit” is the extent to which the director was responsible for the company’s insolvency. If a director is liable, then they will be disqualified as being a director for a set amount of time (up to a maximum of 15 years) and potentially subject to a personal Compensation Order if the director’s actions caused a quantifiable loss to one or more creditors.
  2. Fraudulent trading – a director is liable if they knowingly carry on the business of the company with the intent to defraud creditors. If a director is found liable then they are likely to be disqualified as being a director, they may face personal financial liability and they face criminal convictions including a potential custodial sentence.

Other provisions announced

The Government has also announced that it intends to push through proposals made in 2018 for amendments to UK insolvency laws, which were due to be delayed by Brexit. This includes a moratorium for companies preventing creditors enforcing their debts for a period of time.

Impact

The impact of the provisions announced by the Business Secretary will provide significant comfort for directors of companies who may face a difficult financial time during the Covid-19 pandemic, or who are currently facing difficulty.

However, the provisions announced do not give directors the ability to act however they so wish. They remain accountable if they do not continue to act in the best interests of the company as a whole and, if the company is insolvent, they are still obliged to take into account the interests of the company’s creditors.

The exact detail of the measures will be set out in legislation implemented by the Government in due course. This blog will be updated once more information is available.