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Coronavirus - Proposed Changes to the UK Insolvency Regime

on Monday, 30 March 2020.

On Saturday 28 March, the Secretary of State for Business Energy and Industrial Strategy announced changes to the insolvency regime with the aim of keeping viable companies trading through the unprecedented challenge of the COVID-19 pandemic.

In news which should be welcomed by directors of businesses, trustees of charities and governors of schools who are grappling with the impact of the coronavirus pandemic, the Secretary of State announced:

  • that there would be new rules to make sure companies can continue to get supplies and raw materials

  • a temporary suspension of wrongful trading provisions for directors to remove the threat of personal liability during the pandemic, with  retrospective effect from 1 March 2020

  • that all other checks and balances aimed at directors fulfilling their duties responsibly will remain in force

The legislation officially bringing about these changes has not yet been published, however, it is expected in the coming days and weeks.

Continuation of Supplies

The Department for Business Energy and Industrial Strategy has said that the proposed changes will enable companies to continue buying much-needed supplies, such as energy, raw materials or broadband, with a view to the survival or rescue of their business.

Currently, the Insolvency Act 1986 ('Act') ensures the continuing supply of utilities, including gas, electricity, water, communications and goods or services which enable a company to trade, and where a company has entered into a formal insolvency process, such as administration or liquidation.

The proposed changes appear to suggest that the Insolvency Act will be extended to allow those companies which have not yet entered into a formal insolvency process to ensure the continuation of those supplies in order to enable them to carry on trading.

Coronavirus Legal Advice

Wrongful Trading

The Act currently provides that, in the event that a company is being wound up or has entered into administration, and it appears that a person who is, or was, a director of the company (or a trustee of a charity or governor of a school) knew or ought to have concluded at some point before the commencement of the liquidation or administration that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, the director may be ordered by a Court to make a personal contribution to the company’s assets.

The wrongful trading provisions of the Act require directors to continually assess the financial viability of the company. If it can be determined that, on an objective basis, there is no reasonable prospect that the company can avoid going into insolvent liquidation or insolvent administration, the directors must then take every step to minimise potential loss to creditors and cannot simply avoid the issue by resigning as a director.

The amendment to the Act appears therefore to remove a director's potential personal liability for losses in circumstances when, from 1 March 2020 they knew or ought to have known that the company should enter into a formal insolvency process. As a result, this should allow directors of companies that have been directly impacted by the economic effects of the coronavirus pandemic, to continue trading.

Directors' Continuing Duties

The Secretary of State did however also highlight that whilst there would be a suspension of the wrongful trading provisions, directors, trustees and governors will still owe duties to their respective companies, charities and organisations. Whilst a company is successfully trading, ultimately, these duties are for the benefit of the company's shareholders. Where a company is insolvent, the duty switches so that directors must act in the best interests of the company's creditors as whole.

Where a company has entered into administration or liquidation, the office holder can bring a claim for breach of duty or misfeasance against anyone who has acted as a director where they consider that the director has:

  • misapplied or retained money or other property of the company
  • become accountable for money or other property of the company
  • breached a fiduciary or other duty in relation to the company
  • or has otherwise been 'guilty of misfeasance'

Our Recommendations

The scope for such an application is wide and, given that no indication has been given that claims for other offences under the Act such as transactions at undervalue or preference payments will be suspended, it is recommended that those involved in the running of a company should continue to seek professional advice if they are concerned about the viability of their business and on their personal obligations in these unprecedented times.

In addition, directors of businesses that were in financial distress prior to the coronavirus outbreak in the UK should note that the proposed emergency changes to the insolvency regime are unlikely to be relevant to them.

We will provide a further update when the governement publishes the draft legislation.

In the meantime, for specialist legal advice please contact Ed Husband on 07917 792 602 or Ambuja Bose on 07469 850 886 in our Insolvency team, or complete the form below.

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