COVID-19: Insolvency & directors

As a result of the coronavirus crisis, the government has announced that it will temporarily suspend the wrongful trading on insolvency rules, backdated to 1 March 2020.

Under the existing wrongful trading legislation:

• As a director, you should not allow your company to continue to trade whilst you are knowingly insolvent.
• If you do trade whilst insolvent you have the potential to become personally liable for your company’s debts, including amounts due to HMRC.
• A director should, in the event of potential insolvency, contact an insolvency practitioner and be very careful not to pay one debt in preference to another unless advice has been sought.

New measures: as announced on 28 March 2020:

• A relaxation in the wrongful trading rules.
• A short moratorium or ‘breathing space’ to give companies in difficulty time to explore options for a rescue.

The government said:

"Relaxation of these wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.

Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity. Provisions will be included to enable the changes to be extended if necessary."

The Corporate Insolvency and Governance Act 2020 was passed on 25 June 2020.

The temporary suspension of the rules will end on 30 September 2021 but be replaced by new targeted measures to help smaller companies which will be in force until 31 March 2022. See Temporary insolvency measures ending.

Who can be an insolvency practitioner?

• Insolvency practitioners are specially licenced professionals.

To shut down or not?

• On a practical level, many businesses will suffer a fall in their turnover during the period of the COVID-19 lockdown and after.
• The government has offered a massive range of assistance in order to support businesses that are adversely affected by the virus.
• The new wrongful trading measures now give you more time to review the options. 
• If after taking advantage of the various forms of assistance available i.e. furloughing staff and workers, claiming business grants and rates relief and considering all options for cheap emergency loan funding, you can see that you have no hope of continuing the business, you should plan for the worst and consult an insolvency practitioner.

Background to the legislative changes

The government's new COVID-19 announcements on the insolvency rules come on the back of some already outlined changes.

Back in 2018, the government published a consultation ‘Insolvency and corporate governance’. This sought views on improvements to corporate governance within companies that are in or are approaching insolvency.

In 'Consultation on insolvency and corporate governance: government response' the government made the following conclusions:

Insolvency

We will take steps to strengthen the insolvency framework in cases of major corporate failure by:

• taking forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress.
• legislating to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes.
• legislating to give the Insolvency Service the necessary powers to investigate directors of dissolved companies.
• when they are suspected of having acted in breach of their legal obligations.

We will also create alternative procedures to support business rescue.

Corporate governance

We will take forward the following actions:

• Strengthen transparency requirements around complex group structures,
• Enhance the role of shareholder stewardship,
• Strengthen the UK’s framework in relation to dividend payments,
• Bring forward proposals to improve board-room effectiveness,

Where necessary we will consult further."

External links

Regulations temporarily suspended to protect companies hit by COVID-19 

2018 Consultation outcome: Insolvency and corporate governance.