COVID-19: Emergency changes to insolvency law

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Article

03 April, 2020

Last week, the Business Secretary announced temporary changes to insolvency law in order to protect businesses from the effects of the current COVID-19 (coronavirus) pandemic. The impending legislation will introduce a new moratorium for businesses and will suspend wrongful trading laws for the duration of the pandemic.

A New Moratorium

When a company goes into administration, a moratorium is imposed which restricts the ability of creditors to commence insolvency or legal proceedings against the company and to enforce any security a creditor may have over the assets of the company.

The Government has proposed prospective legislation to extend the moratorium to businesses which are undergoing a financial rescue or restructuring process to keep trading.

Once in place, the Business Secretary has confirmed that the legislation will apply retrospectively from the beginning of March and will give firms extra time and space to deal with the crisis and be ready when the crisis ends.

It is not clear exactly what companies this new moratorium will apply to and what effect the moratorium will have, but it is likely to operate in a similar manner to the administration moratorium. In other words, creditors' claims and winding up petitions will not be able to be brought and pending actions will likely be stayed or dismissed.

Temporary Suspension on Wrongful Trading Laws

Directors of a company can be personally liable under existing wrongful trading laws if they continue to trade a company when they know or ought to know that the company has no reasonable prospect of avoiding insolvent liquidation. At this point, directors should take steps to minimise the potential losses to creditors.

The temporary suspension of the existing wrongful trading laws will ease the burden on directors who continue to trade during the current pandemic. This will allow directors to pay company employees and suppliers in an attempt to ensure the survival of their business.

These measures will help to alleviate some of the strain on companies during this time and will prevent them from going into liquidation unnecessarily. However, the Business Secretary has also emphasised that "all the other checks and balances that help to ensure directors fulfil their duties properly will remain in force", namely directors duties and fraudulent trading laws. Any breach of directors duties or attempt to defraud a company's creditors will still result in directors being held personally liable.

We will continue to monitor all Government and HMCTS guidance on COVID-19 regarding insolvency and businesses.

For further information or advice please contact either Stephen McArdle via Stephen McArdle">email or on 0333 207 1142 or Pauline Rigby via Pauline Rigby">email or on 0333 207 1131.

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