HomeFWJ TakeawayResourcesChanges to insolvency legislation

Covid 19 has lead to changes in the law to help businesses and directors. Our expert team has helped companies overcome challenges for many years. Let us help you too.

The Covid-19 crisis arrived at a speed few could have foreseen, and it brought with it unpredicted difficulties not only to the UK population personally, but had a huge and immediate impact on the economy and businesses throughout the UK and the world.

Proposed changes

The government have quickly responded to the crisis in an attempt to keep the economy afloat as far as possible, through a series of measures aimed to help businesses. For more detail see: Financial support for businesses during coronavirus (COVID-19) and SME businesses and government rescue packages and COVID-19: How is the Government supporting businesses?

Measures include proposed changes to insolvency legislation by way of a proposed insolvency bill, including:

  • The introduction of a moratorium period for distressed businesses to consider a rescue plan of up to 40 days, during which they will be protected from recovery action by creditors.
  • The provision of the introduction of a new restructuring framework which will be able to bind creditors to a reorganisation plan.
  • Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 June 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the company or that the company would have become insolvent in any event, coronavirus’ or not (which will be difficult to prove). Winding up will now commence from the date of the order, meaning that transactions entered into between the petition and the order will no longer be void unless validated by the court.
  • A prohibition on termination clauses in supply contracts being invoked by reason of a company entering into a relevant insolvency procedure, in order to ensure businesses entering insolvency can continue to access essential supplies to keep operating.
  • To temporarily suspend wrongful trading laws for three months so that company directors can keep their businesses going without the threat of personal liability. The wrongful trading provisions apply retrospectively from 1 March 2020 for three months for company directors so that they can keep their businesses going without the threat of personal liability.

These changes will take effect once the Corporate Insolvency and Governance Bill 2019-21 makes its way through Parliament. It is likely however that the retrospective effects set out above will be in place when the bill is passed.

Current changes already in place

Commercial rent

The Coronavirus Act 2020 (CA 2020) prevents a landlord of a business tenancy from applying for forfeiture of a lease for non-payment of rent during the ‘relevant period’, which currently is up until 30 June 2020. However, note that this doesn’t prevent landlords from issuing commercial rent arrears recovery, including service of a statutory demand and winding up proceedings. Therefore, while you may be able to avoid forfeiture in the short term for non-payment of rent at this time, if you are having trouble paying the rent on your commercial business premises, then you should speak to your landlord to try to reach an agreement if possible.

Court operation

The lockdown has had a significant impact on the ability of the court to carry out normal functions. In response, the courts are operating under new protocols and procedures under a new Temporary Insolvency Practice Direction (TIPD) which was introduced with effect from 6 April 2020 and (currently) expires on 1 October 2020. This provides for the usual rules on filing and serving documents, and attending court, to be amended to accommodate the lockdown. See: TIPD for detail.

For more information on court operations see: COVID-19 and the operation of courts: What it means for you and Debts and Coronavirus: how best to pursue payment of outstanding debts.

Wrongful trading

The usual position is that if a director allows a company to continue trading when they knew (or ought to have known) that it was unlikely to avoid insolvent liquidation, then they may find themselves personally liable to pay any increase in losses from the date when that knowledge was clear. This is to prevent directors incurring additional credit at a time when they know that there is no reasonable chance that they will be able to repay those creditors. A later liquidator or administrator can recoup those losses from a director personally.

The Coronavirus crisis poses a particular problem with this legislation. This is an unprecedented time, and a director might be unsure whether the company will be able to pay creditors in the future that they incur now, as a result of the unusual nature of these times. Their usual duty would naturally be to cease trading at this time. However, in view of the fact that nobody really knows when matters will return to normal, and that it is not in the interests of the economy for otherwise viable companies to cease trading because they are not sure how long this crisis will persist, the measures introduced by the government are welcome.

Whilst this has not (as at the time of writing) been specifically brought into legislation, the announcement by the government specifically giving three months from 1 March 2020 means that any backtracking on this is highly unlikely. It can give some comfort to business owners experiencing problems as a result of the lockdown and the current crisis, who has a viable business that but for COVID-19 would be able to continue to trade successfully.

Any director wanting to make use of this temporary suspension however should take legal advice on their specific situation. When a later liquidator assesses whether a wrongful trading has occurred, they tend to look at a longer period, and if your company has generally been heading towards insolvency prior to the Coronavirus crisis then you are still unlikely to enjoy the protection that the new legislation may bring. For more on this see: Government changes to insolvency law not as clear-cut as they seem.
No change to usual director duties on insolvency

The temporary suspension on wrongful trading penalties only apply to wrongful trading. All usual directors’ duties remain in place and must be followed, even in these difficult times.

What can I do as a director?

Take expert advice – if you are a director of a company that is at risk of insolvency, whether due to the COVID-19 crisis or otherwise, it is essential that you take early expert advice and are clear on your duties and responsibilities to avoid personal liability and act in the best interests of the company.

  • Be honest with yourself and your board members – It is vital now to be honest about the company’s situation. Now is not the time to stick your head in the sand. If your business is in trouble, take expert advice on the many options available to turn your company around. The earlier problems are addressed, the more options for success. Contact our expert team at Francis Wilks & Jones who can discuss all of the options available to you.
  • Keep open lines of communication – this means with everyone: employees, creditors, landlord, the taxman, your financier etc. It is likely that as long as you are open, particularly with your creditors, you will be able to obtain their forbearance for a while. Avoidance is not an option right now.
  • Hold regular board meetings – albeit ‘virtually’, so that you can make decisions daily in these fast changing times. Document all decisions, and the reasons behind them.
  • Be armed with information – ensure that you have all the necessary information you need. That your accounts are up to date and accurate, and engage with your fellow directors, shareholders and professional advisers to prepare a business plan to see you through this current situation and beyond.
  • Reach out to others in the same situation – get in touch with trade bodies in your sector area to coordinate responses on issues that are facing all of you. There is strength in numbers and others during this time may be able to provide guidance and tips that otherwise they may not have been willing to share.

It is in nobody’s interests for businesses to fail during this crisis. The knock-on effect on other businesses and on the country will be catastrophic. The good news is that the government have brought in unprecedented emergency measures to help businesses, and you should use these where appropriate to ensure that your viable business can continue to trade.

At Francis Wilks & Jones we have a team of business rescue and company specialists who can review your situation with you and provide you with a range of options to consider, or put you in touch with one of our external experts if appropriate, such as a business rescue expert.

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