COVID-19 – update on Company and Insolvency Rules
31st March 2020
On 28th March the UK Insolvency Service announced new measures to amend insolvency laws to give companies breathing space and to keep trading while they explore options for rescue.
The Business Secretary has announced he will bring forward changes (which were already in the pipeline, following a consultation in 2018) to enable UK companies undergoing a rescue or restructure process to continue trading, giving them what the CBI has referred to as “headroom” that could help otherwise viable businesses to avoid insolvency.
This will include enabling companies to buy much needed supplies, such as energy, raw materials or broadband while attempting a rescue and temporarily suspends wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their business going without the threat of personal liability.
Wrongful trading is when a company continues to trade when its directors know, or at least ought to know, that there is no reasonable prospect of it surviving (i.e. that it is either already insolvent, or can’t trade its way out of its difficulties so will shortly become insolvent). If a company continues to trade beyond that point, the directors of the company may, in normal circumstances, be held personally liable for debts incurred during that period. The government is looking to change that rule.
As always, the devil will be in the detail of the legislation, which is still awaited at the time of writing.
In addition, new restructuring tools will include:
• a moratorium for companies, giving them breathing space from creditors enforcing their debts for a period of time while they seek a rescue or restructure;
• protection of their supplies to enable them to continue trading during the moratorium;
• a new restructuring plan, binding creditors to that plan; and
• key safeguards for creditors and suppliers to ensure they are paid while a solution is sought.
The Government made it clear, though, that existing protections against fraudulent trading (i.e. where a company’s business is deliberately conducted so as to defraud or deceive its creditors), combined with the rules on director disqualification for misconduct while acting as a director, will remain in force and will act as a deterrent against poor director behaviour.
The Business Secretary also announced on 28 March 2020 that the UK Government intends to introduce legislation to ensure that companies which are required by law to hold Annual General Meetings (AGMs) will be able to do so safely, consistent with the restrictions on movement and gatherings introduced to address the spread of coronavirus. This will include provisions allowing them to hold AGMs online, or to postpone meetings for the time being.
From 25 March 2020, companies have also been entitled to apply for a three-month extension to the deadline for the filing of their accounts. There is an online application process - https://www.gov.uk/guidance/apply-for-more-time-to-file-your-companys-accounts.
We will continue to provide updates on the legislation once the details are released.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at March 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.