Insolvency and the Coronavirus

Category: Insolvency

Insolvency put simply, is where a company is unable to meet its liabilities. Under current legislation that oversees insolvency, an insolvent company is vulnerable to being wound up. A director can be held personally liable if they acted in breach of their director duties set out in the legislation.  

Cash Flow

The impact of the coronavirus is no doubt affecting the cash flow at large number of companies. This may lead to companies withholding payment to protect their cash reserves and guard against insolvency. Under current legislation, the director of a company which trades whilst insolvent can face serious repercussions. Even so, the Government has announced that it intends to relax the Insolvency Rules during this unprecedented time.

Debtors and Creditors

Wrongful trading law

The biggest change we can expect to see is the suspension of the wrongful trading law. This is where a director has a duty to take reasonable steps to minimise the potential loss to creditors once it is reasonably apparent that there is no prospect of the company avoiding insolvency. The liquidator of a company can bring about a civil offence against a company director in their personal capacity.

At the minute, it’s not clear how the rule will be suspended or how it will work in practice. We think that it is likely to decrease the pressure on directors. This will allow them to continue trading without the threat of being held liable for wrongful trading. This will include being able to pay suppliers and employees.

Moratorium period

The UK Business Secretary has announced that the Government intends to introduce a moratorium period, essentially a waiting period, for companies that are restructuring. Importantly, this means that no creditor during the moratorium period, will be able to petition to wind up a company that is undergoing a restructure.

No legislation has been passed as yet, that deals with relaxing the rules around insolvency.  Nevertheless, the UK Business Secretary has announced that when it is passed, it will apply retrospectively to the start of March 2020. The purpose of the changes is to assist companies in this turbulent time.

Coronavirus Resource Hub

What now?

If you have questions or would like some guidance as to what to do next, please get in touch with our Commercial Dispute Resolution team. Please call Ceren Fox on 01752 827120 or email her at [email protected].