The proposed amendments to insolvency law following COVID-19

31st March 2020

Insolvency law

The Government announced changes to insolvency laws at a press conference on Saturday, 28 March 2020, in response to the COVID-19 outbreak.

Among the changes announced was the suspension of the rules on wrongful trading. Wrongful trading is a way of making company directors, and shadow directors, personally liable for debts incurred after a time when a reasonable person would have stopped trading. This is established through several key indicators – the balance sheet, bounced cheques/direct debits/standing orders, or creditors obtaining judgements/putting supplies on stop.

If a company was clearly heading towards failure on 1 November 2019, then why would directors carry on until 29 February 2020? The Wrongful Trading provisions of the Insolvency Act enables creditors to look to directors to account for creditors whose claims were made after the time that they should have ceased, through a liquidation or administration.

Due to the current unprecedented circumstances, many directors of companies may now admit defeat if they risk personal liability by carrying on. Consequently, the Government have stepped in to temporarily relieve directors of this threat. This is in the hope that the existing laws for fraudulent trading, and the risk of director disqualification will continue to act as a deterrent against director misconduct.

Further proposed points are:

  • a moratorium for companies - giving them a break from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure. This is much like an administration with an exit via a Company Voluntary Arrangement (“CVA”) – but both procedures may be simplified for these purposes.
  • protection of their supplies to allow them to continue trading during the moratorium.
  • a new restructuring plan, binding creditors to that plan, which is likely to be an all-encompassing CVA type procedure.

The above points are to include key safeguards for creditors and suppliers to ensure they are paid whilst a solution is obtained. Essentially, business will be conducted on a pro-forma/cash on delivery basis to ensure that key suppliers are unable to leverage the payment of historic debt by refusing to supply.

The full Government update on this and other changes can be found here.

If you have any concerns about the effect of COVID-19 on your business and would like to find out more about the proposed amendments to insolvency law, please get in touch to discuss your specific needs.  We are not licensed insolvency practitioners but we certainly can help in the discussions about whether you may need one, and know many ourselves that we can recommend.