Coronavirus response see wrongful trading rules set to be suspended
This will officially bring in a moratorium or “breathing space” that lawfully gives companies time to explore options for rescue and restructure.
The other big news was that the current rules on wrongful trading are to be suspended.
The current rules state that directors of limited liability companies can become personally liable for business debts if they continue to trade when uncertain whether their company’s can meet their debts.
Their rationale is that if these rules are relaxed then directors will be reassured that decisions they have to make now about the future viability of their businesses won’t be unduly influenced by the exceptional circumstances beyond their control they find their businesses in.
The new rules, which they plan to legislate through parliament at the earliest available opportunity, will include:
- Wrongful trading provisions to be suspended to remove threat of personal liability and give directors confidence to pursue new strategies to trade and save the business
- Moratorium on companies from creditors enforcing their debts for a period of time whilst they are seeking rescue or restructure.
- Protection of their supplies to enable them to continue trading during this period
- A new restructuring plan that binds creditors to its outcomes
- Safeguards for creditors and suppliers to ensure they are paid while a solution is sought
The existing laws for fraudulent trading and subsequent director disqualification will remain to continue to act as an effective deterrent against director misconduct.
Chris Horner, Insolvency Director with Business Rescue Expert said: “These new rules are not a get-out-of-jail-free card.
“We’re in favour of support to companies in straitened circumstances if it helps us in our work of rescuing them and putting them on a sounder footing, but there are limits.
“The rules on preferential payments and transactions at undervalue will still apply and wrongful trading will still apply if the business had already reached the point of no return prior to March 2020. It therefore remains important to take advice if you still expect solvency issues, regardless of the government assistance.”
Duncan Swift, President of R3, the insolvency and restructuring trade body said: “We’re hopeful the government will address many of the concerns our members have expressed about the reforms.
“For example, the moratorium won’t be useful if it can’t be accessed by all insolvent companies, so while they work on the details they should listen to creditors and landlords about how they will be affected by it.
“Our members will continue to use the wide range of tools at their disposal to help restructure businesses and rescue jobs but there are some serious concerns about the plans to suspend wrongful trading.
“A blanket suspension risks abuse. The provisions are there for a reason and protect creditors.
“We understand that directors may be worried about consequences if they’re already missing debt payments but good advice from an insolvency practitioner will remove any risk of facing a wrongful trading action.”
None of us have lived through a situation similar to this – unless you survived the Spanish Flu in which case stay extra safe.
While it’s true that some laws are being tweaked, the fundamentals remain the same and if you’re already at risk of or actually trading while insolvent then you need some qualified, experienced help and advice right now.
We can get an understanding of your company and the situation you face and come up with a clear roadmap to work through.