The Government has relaxed the insolvency rules to give companies a better chance to “emerge intact” when COVID-19 restrictions end.
Wrongful trading, a civil offence under UK insolvency law, has been temporarily suspended. Ordinarily, directors of limited liability companies are held personally liable for business debts if they continue to trade when they’re uncertain whether or not their company can avoid liquidation.
The change should give directors greater confidence that they won’t be held personally liable if their businesses fail.
Announcing the change, Alok Sharma, Secretary of State for the Department for Business, Energy and Industrial Strategy, said the provision would apply retrospectively from 1st March 2020 for three months, with legislation being introduced at the earliest opportunity.
The move was welcomed by business groups. Suren Thiru, head of economics at the British Chambers of Commerce, said: “It is right that the rules on wrongful trading are temporarily suspended to ensure that directors are not penalised for doing all they can to save companies and jobs during this turbulent period.”
“It is right that the rules on wrongful trading are temporarily suspended to ensure that directors are not penalised for doing all they can to save companies and jobs during this turbulent period.”
For the Institute of Directors, corporate governance policy advisor Carum Basra wrote: “Directors are facing immense challenges, and these are pragmatic steps to provide relief. The temporary suspension of ‘wrongful trading’ insolvency provisions will help to avert entirely preventable corporate collapses.”
Directors may no longer have to worry about falling foul of the law on wrongful trading, but the temporary suspension won’t give them carte blanche. Other checks and balances will remain in force, said Basra: “Fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.”
As well as suspending wrongful trading, the Government plans to introduce new procedures for companies undergoing rescue or restructuring. It will allow them to continue trading in a bid to avoid insolvency.
Said Sharma: “Our overriding objective is to help UK companies which need to undergo a financial rescue or restructuring process to keep trading. These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends, whilst ensuring that creditors get the best return possible in the circumstances.
The new rules will make sure that companies undergoing restructuring can continue to get hold of supplies and raw materials.”
It’s thought that the new measures will take a similar form to Chapter 11 proceedings in the US. Said the IoD’s Basra, “The US Chapter 11 process seeks to allow a wide range of proposals to be put into a reorganisation plan, including having the company and its management survive the process.”