Coronavirus-Inspired Protections from Corporate Insolvency

The UK Government’s approach to the economic effects of the Coronavirus pandemic has been to pull a series of different levers to try to protect businesses and the people who work for them. As part of that, on 26 March 2021, they legislated for the temporary suspension of liquidation petitions continuing until 30 June 2021.

The purpose of the suspension is to give companies breathing space from their creditors, at a time when their finances are strained due to forced closure during the pandemic. It was introduced in the Corporate Insolvency and Governance Act 2020, but it’s not a blanket ban on liquidations. The rules say that a company can still be wound up for non-payment of a debt if the creditor shows that he has reasonable grounds to believe that the non-payment isn’t Covid-related.

Companies might also be entitled to a moratorium against creditor action, which was also introduced in the 2020 Act and is available until the end of September 2021. If obtained, the moratorium can protect the company from action being taken against it by creditors. The UK Government also re-introduced the temporary rule that individual directors of insolvent companies cannot be held liable for wrongful trading. This protection will now expire at the end of June 2021.

On the other hand, the UK tax authorities have now regained their ‘Crown preference’, meaning they are now back in the position of being a preferred creditor when a company is put into liquidation, putting them ahead of ordinary trade creditors if there is money to be distributed. As a result, it is likely that we will see an increase in the number of companies placed into liquidation when the protections are eventually lifted.

Directors of UK companies should put in place a survival plan, which may involve restructuring their existing operations, or seeking the moratorium against creditor action, before the protections disappear. Discussions with lawyers and accountants are essential parts of that planning process.