The UK government announced on Saturday 28 March 2020 that it will make changes to insolvency law to enable UK companies undergoing a rescue or restructure process to continue trading and to temporarily suspend wrongful trading provisions for company directors. It is hoped the changes will give companies much-needed breathing space that could help them avoid insolvency whilst dealing with the economic impact of the COVID-19 pandemic.
The wrongful trading provisions will be temporarily suspended, retrospectively from 1 March 2020, for three months for company directors so they can keep their businesses going without the threat of personal liability. This will be a welcome change for directors given that the current wrongful trading rules mean directors risk personal liability if they fail to take every step to minimise potential losses to creditors once there is no reasonable prospect of avoiding an insolvent liquidation/administration. By temporarily suspending these provisions, it is hoped that fewer directors will file for insolvency proceedings prematurely, with the existing laws for fraudulent trading and the threat of director disqualification remaining in force as a deterrent against director misconduct.
New restructuring and moratorium procedure
The UK government has previously consulted on changes to the corporate insolvency regime and announced plans to introduce new insolvency restructuring procedures in August 2018. These plans are now being fast-tracked and will include a short moratorium or ‘breathing space’ that will give companies in difficulty time to explore options for rescue. There is limited detail in the Government’s announcement regarding these plans but it is expected they will enable companies to continue buying much-needed supplies, such as energy, raw materials or broadband while attempting a rescue.
The changes are intended to be brought into effect “at the earliest opportunity” although the exact timing remains uncertain, with Parliament currently in recess until 21 April 2020. Provisions will be included to enable the changes to be extended if necessary.
The temporary suspension of wrongful trading provisions will give much-needed headroom for company directors to enable otherwise viable businesses to use the Government’s support package and weather this crisis. However, further details are urgently needed in what is already a period of great uncertainty for business. Notably, it remains to be confirmed whether companies that are already insolvent will be eligible for the new moratorium, with the Government’s proposals in August 2018 excluding companies that were already insolvent from its scope. There will be a real focus on the scope of the moratorium and which companies in the current COVID-19 crisis will be able to qualify.