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Struggling companies still await implementation of revised insolvency laws

This period of uncertainty comes after it was announced by the Government on 28 March 2020 that the rules on wrongful trading were to be suspended. The new legislation to implement this and other changes has however yet to be implemented.

This delay has left company directors not knowing precisely what further options they may have to protect their business if it is struggling. Business owners need clarity on what personal exposure they may be facing if they continue to struggle on in these unprecedented times. They also need to know what the precise terms of the protection that their business may receive from creditors during these difficult trading conditions.

What is the new legislation?

Following the announcement on 28 March, the Government issued a press release clarifying the new legislation:

1. The suspension of wrongful trading provisions will apply for a period of three months, from 1 March 2020, with the ability to extend if necessary. Wrongful trading constitutes a statutory offence under section 214 of the Insolvency Act 1986. Once a director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent administration or liquidation, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors. If they fail to do so, the court can order the director to make such contribution to the company’s assets. This is a personal liability on the director. It provides an exception to the general rule that a director will not be personally liable for the company’s debts.

2. Insolvency laws are to be amended in accordance with proposals from 2018 to give UK companies a breathing space and enable them to keep trading while they explore options for rescue. The draft legislation is awaited, but it could add new restructuring tools to the UK’s insolvency toolkit, for example:• A moratorium for companies from creditor action while they seek a rescue or restructuring.• Protection of supplies to enable companies to continue trading during the moratorium.• A new restructuring plan that would bind all creditors.

What will the proposed temporary suspension of section 214 mean for company directors?

The new legislation, when implemented, may protect a company director from personal liability if they continue trading the business even if they take the view that it is likely to go bust. Many businesses will continue to trade in the hope of further support from the Government. For example, there has been widespread discussion about an extension of the Job Retention Scheme beyond the end of June. If the directors do carry on trading in such circumstances, they will not be personally liable for wrongful trading under Section 214. There are other more serious offences under the Insolvency Act, for example, defrauding creditors, where personal liability could still arise. However the suspension of Section 214 could give company directors a limited degree of comfort if their business is struggling financially. They can keep going safe in the knowledge that, if the business ultimately fails, they will not have to put their hand in their own pocket.

What about the other changes that the Government has announced?

Company directors in struggling businesses will also be anxious to find out the detail of the changes to the insolvency legislation. It remains to be seen exactly what protections will be put in place for businesses that face claims from creditors. For example, one of the proposed changes is to allow struggling companies to continue to receive essential goods and services while they go through any pre-insolvency moratorium process or formal restructuring plan. Utility suppliers would not be entitled to use their contractual termination rights to withdraw their goods and services. This could be of significant benefit to the directors by giving them breathing space to sort out any restructuring which could save a significant number of jobs. The company directors could continue to trade in the interim with the comfort of knowing that these vital utility services were unlikely to be withdrawn. Again, however, the detail of these new provisions needs to be ironed out.

When can expect further clarification?

Given that the announcement was originally made at the end of March, it is hoped that the legislation should be ready in the near future, but no date has yet been fixed.

In the meantime, if you require any advice on how these new measures may affect your business, or have any other insolvency related matters, arising from COVID-19, please contact Gordon Deane.

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