30 Mar 2020

Government relaxes insolvency rules for struggling companies

Government relaxes insolvency rules for struggling companies

The UK Government has relaxed insolvency rules to give bosses more breathing space when their businesses are hit by coronavirus.

Company directors can be personally liable if they fail to wind up a company when they know, or ought to know, that it is running out of money and facing insolvency, known as wrongful trading.

However, Business Secretary Alok Sharma has announced a temporary suspension of those rules, applied retrospectively from March 1st, meaning that directors would not be personally liable for their decisions during the pandemic.

The measures will enable companies to continue buying much-needed supplies, such as energy and raw materials, while attempting a rescue. It will also offer reassurance to directors presently discussing working capital facilities with their funders - such as the Coronavirus Business Interruption Loan - who may otherwise have been concerned that they fell foul of the existing rules.

“The government is doing everything in its power to save lives and protect livelihoods during these unprecedented times,” Mr Sharma said.

“Applying a common-sense approach to regulation will ensure products are safe and reach the market without any unnecessary delay, getting vital protective equipment such as face masks to frontline staff as quickly as possible.

“These measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.”

Industry reaction

Matthew Fell, chief UK policy director at the CBI, welcomed the announcement.

He said: “The temporary suspension of wrongful trading provisions, along with other measures, will give much needed headroom for company directors to enable otherwise viable businesses to use the government’s support package and weather this crisis.”

The Business Secretary also announced yesterday that the Government will introduce legislation to ensure those companies required by law to hold Annual General Meetings (AGMs) will be able to do so safely, consistent with the restrictions on movement and gatherings introduced to address the spread of coronavirus. 

Companies will be able to hold AGMs online or postpone them.

Analysis

Insolvency litigation specialist Ross Webb, a partner at Aberdein Considine, urges caution among directors.

He said: “The UK and Scottish Government interventions will allow some businesses to ride out the storm, for others it will delay their demise.

“These new measures may offer short-term protection for directors, but the courts will still look carefully at their conduct over a longer period, perhaps 6 to 12 months.

“The changes don’t prevent companies from becoming insolvent, but seem designed to stop directors from pulling the plug when they should as the rules currently stand. This will allow some insolvent businesses to continue on for a bit longer than normal, but some will still go bust.

"Importantly, it will also provide some businesses, which remain viable in the long-term, with extra time to secure the working capital facilities they need, which may not otherwise have been possible.

“Directors running businesses which find themselves in trouble should take advice now and not think that these rules offer indefinite protection against wrongful trading.”

Insolvency Practitioners are reporting that they are receiving many enquiries, and that commercial landlords could be hit hard.

Mr Webb added: “The commercial property market, in particular commercial landlords, needs to be alive to the very real likelihood that there will be an increase in administrations, liquidations and the number of CVA proposals when the reliefs and protections are removed.

“There is going to be immediate and significant financial hardship for the majority, if not all, involved in the commercial property market.”

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