Lawful Wrongful Trading: Businesses get much needed insolvency respite

April 22, 2020

2 min read

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What's going on here?

The government has announced plans to change insolvency laws. The aim is to give firms more breathing space in their fight with the effects of the coronavirus. The changes will be enacted after Easter, when parliament returns from recess.

What does this mean?

The measures will include two major changes.

The first is a retroactive suspension of unlawful trading rules. It will have effect from 1 March. Under the current unlawful trading provisions, if a director should have concluded that the company cannot avoid insolvent liquidation or administration, and doesn’t take all the necessary steps to minimise losses, he risks personal liability for the losses. The suspension will encourage directors to use the financial packages offered by the government and continue trading to keep the economy going. 

However, the current laws regarding fraudulent trading will remain in force. The directors will still have to comply with their duties and act in the best interests of the company. 

The second important change is the introduction of 3 new elements to the UK’s Insolvency Framework. Proposed for the first time in 2018, the alteration to the Framework will introduce:

  • A period of time before creditors can enforce their debts, called a moratorium. It is not clear what the duration of this period will be but it is presumed that it will last up to 3 months;
  • Protection of their supplies to enable them to continue trading during the moratorium; and
  • A new restructuring plan, binding creditors to that plan.

This would be the first time a restructuring plan can be implemented without the consent of each class of creditor. In turn, this makes it easier for businesses to adapt and “bounce back” after the pandemic has passed.

What's the big picture effect?

There are 3 main take-away points. Firstly, the government is introducing similar restructuring concepts to what is found in many EU countries. In the grand scheme, this could be the first step towards harmonising essential areas of law between the EU and UK. 

Secondly, the changes are necessary for the government’s strategy to help businesses. Business executives ought to have more freedom now the government has alleviated the risk of personal liability. Businesses would do well to investigate the government schemes available, including a new lending facility from the Bank of England, a job retention scheme and many other initiatives.

Finally, these changes set a valuable precedent for future legislative changes. Such changes may help to avert future, preventable corporate collapses.

Report written by Bogdan Ciacli

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