31 March 2020

How will recently announced changes to insolvency regulations affect me?

What are the most recent developments?

The biggest development to hit the headlines is the proposed three-month suspension of wrongful trading provisions to take effect from March 3 2020.

Other key developments include bringing forward proposed amendments to the insolvency frameworks which have been in consultation for many years including:

  • The creation of a general insolvency moratorium to assist with rescue and restructuring.
  • Enhanced protection for key contracts, supplies and services.
  • The introduction of a new flexible restructuring plan procedure with the ability to bind different classes of dissenting creditors.

Why is it important?

When taken together with recent announcements by the courts adjourning or staying enforcement it is clear that the Government’s emphasis is on steadying the ship by encouraging rescue and restructure rather than enforcement.

The Confederation of British Industry (CBI) describe the changes to wrongful trading as “much needed headroom for company directors to enable otherwise viable businesses…to weather the crisis.” The aim is to give companies and directors confidence that they have time to explore government funding packages before immediately resorting to insolvency.

Arguably, however, the change to wrongful trading isn’t necessary.

Gov.uk has stated that personal liability arises where a director “continues to trade when uncertain about whether their businesses can continue to meet their debts” and that the “relaxation of these rules will reassure directors”. Read more about this here.

In fact, wrongful trading occurs when the company has no reasonable prospect of avoiding insolvent liquidation and trades to the detriment of creditors. This is a much sterner test by comparison, so there are relatively few wrongful trading claims.

The “blue sky” test (a common law defence to wrongful trading) has long been used to excuse directors where they have a reasonable belief that the company can continue to trade and will trade out of its difficulties. It would be difficult to find a better example of this test in operation than the current circumstances.

Will this protect me from personal liability?

The amendments are still being drafted and will be presented to Parliament “at the earliest opportunity”. We don’t therefore know how they will operate in relation to wrongful trading.

Whatever the case, the implication that personal liability overall will be avoided as a result of the changes is also misleading.

Gov.uk guidance specifically outlines that there will be no changes as a result of Covid-19 to rules relating to fraudulent trading or director’s disqualification.

Similarly there is no mention of potential liabilities which might arise for (amongst others):

  • Misfeasance (section 212 Insolvency Act 1986)
  • Transactions at an undervalue (section 238 Insolvency Act 1986)
  • Voidable preference (section 239 Insolvency Act 1986)
  • Transactions defrauding creditors (section 423 Insolvency Act 1986)
  • Void dispositions (section 127 Insolvency Act 1986)

A wide number of causes of action arise against directors when they authorise a company to enter into transactions whilst insolvent, even if they are carried out in good faith and in the ordinary course of business.

In particular, directors have a duty to act in the best interests of creditors when a company is insolvent or they could be liable for breach of duty.

Any practical advice?

If you are, or may be, trading whilst insolvent:

  • Take all possible steps to avoid loss to the company’s creditors
  • Take independent legal and financial advice on your duties as a director and government funding packages available
  • Keep up to date financial information and cash flow forecasts
  • Consider carefully the government funding options and the company’s eligibility
  • Hold regular board meetings and keep records of decision making with board minutes and resolutions – the government proposals also include provisions for greater flexibility where companies are required to hold Annual General Meetings (AGMs), including holding them online
  • Coordinate with key stakeholders, in particular existing lenders and HMRC, where an event of default is likely to occur
  • Manage your supply chain effectively and monitor the status and availability of employees, customers and suppliers

Read more in our articles on How does Covid-19 affect my business finance? and Tackling cash flow problems until Government Covid-19 support arrives or download Business Know How On Covid- 19.

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About the Author
Alex Wild, Partner

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