Insolvency Rule Changes – 28 March 2020
(Please also see update below from 20 May 2020)
The relaxation of the insolvency rules on wrongful trading announced earlier this evening would be a welcome relief for smaller companies needing to rely on extra credit to see them through these tough times.
This is designed to allow companies to take on more debt such as ordering essential goods from suppliers or obtaining a new bank loan to get them through the Covid 19 crisis, without the directors being held personally liable for the repayments.
But what was interesting was that the Business Secretary was keen to emphasise that despite the relaxation to this one section of the Insolvency Act, all other “checks and balances” would remain in place. Also, the relaxation is not open ended, it will only be temporary.
Directors therefore need to be mindful of the other sections of the law that exist to protect the position of their creditors should the worst happen.
Directors can still be held to account for fraudulent trading, preferring the position of one creditor over another, or generally not acting in the company’s best interest by breaching their general fiduciary duties. Each of these provisions can lead to the directors being ordered to personally pay a contribution to the company’s debts out of their own pockets. It is also notable that there has been no change to the directors’ disqualification regime.
It’s also worth pointing out that the company will remain liable for all the additional debt incurred during the coronavirus period. This will include any extra debt taken on from suppliers who have director personal guarantees written into their terms and conditions – which is very common particularly with larger organisations. And there is no mention in the current changes which prevents a creditor of a company issuing proceedings to recover sums outstanding.
Plans for new restructuring tools were also announced including;-
- A moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
- Protection of a company’s supplies and raw materials to enable them to continue trading during the moratorium; and;
- A new restructuring plan which seeks to bind creditors to that plan
The proposals will include key safeguards for creditors and suppliers to ensure they are paid while seeking a solution.
Detailed information is not yet available for the new rules, but it is reported that legislation to introduce these changes will be introduced in Parliament at the earliest opportunity.
Changes to Insolvency Legislation for Companies – an Update 20 May 2020
At the end of March the Business Secretary announced that proposed changes to insolvency law for companies would now be “fast tracked” through Parliament as a result of the Covid 19 Pandemic.
Today (20 May) it was announced that the Corporate Insolvency and Governance Bill has now been laid in parliament pending being formally debated within the next few weeks. (At this time, it is not yet the law).
However it was originally announced at the end of March that the current “wrongful trading” provisions would be relaxed so that company directors could not be held personally liable for continuing to trade and incur additional credit whilst technically insolvent as a result of the effects of Covid-19.
It was widely assumed that this relaxation would apply to all companies which became insolvent at this time. In the actual Bill being laid before Parliament however, there appears to be a subtle modification to this original “blanket” announcement in that it will only apply to those directors who are taking all necessary steps to minimise the effect of any additional losses to creditors during the period from I March 2020 to 1 June 2020.
Whilst the detail of the Bill is still to be debated, it is worth emphasising that any directors worried about the implications of continuing to trade during this highly unsettling and worrying period should take advice on their company’s position at the earliest possible opportunity.
As we said in our original commentary about these changes, directors must be continually aware of all of the other relevant sections of insolvency law which seek to protect the position of creditors should the company go bust. All of these sections still apply, and should the worst happen may result in directors becoming personally liable for company debts.
But always remember, the Dodd Rescue team are here to help you so please contact Jackie Kirsopp (Jackie.kirsopp@doddaccountants.co.uk) if you need to chat through any issues.
