Will The Coronavirus Force My Business Into Insolvency?

With the involuntary closure of many businesses forced by the UK-wide lockdown, previously successful companies are beginning to feel the strain and becoming more concerned about their future viability.

Many businesses simply do not have the income or cash reserves to pay their creditors at this time. This is not due to a failure of their business plan or a lack of demand, but because the economy has been driven to a dramatic and unprecedented halt as a result of Covid-19.

As matters currently stand, if a company does not pay a debt of £750, a creditor can instigate insolvency proceedings.

Furthermore, if a company director knows (or ought to have known) that there is no reasonable prospect of avoiding insolvency but continues with their business notwithstanding this, that director can be personally liable for what is known as ‘wrongful trading’ and be ordered by the Court to contribute towards the company’s assets for the loss caused.

Changes to insolvency rules to support businesses impacted by the coronavirus

On 30th March, the Government announced proposed amendments to existing insolvency laws, setting out a number of measures designed to give businesses breathing space, so as to enable them to weather the storm caused by the coronavirus. These proposals have not yet made their way into legislation but when they do, both companies and their directors will no doubt welcome them.

The proposals include:

1. A disapplication of the wrongful trading provisions for a period from 1st March for three months.

As with the other proposals that have been outlined, we will not know the exact parameters of what is intended until such time as the new rules are issued.

However, it would certainly appear that the Government has in contemplation a scheme whereby directors of a company that subsequently enters insolvency will not be held liable (as they otherwise would be) for any additional shortfall to creditors incurred within that period.

2. Measures to prevent creditors seeking to put a company into administration or forcing it into liquidation, where that company is taking steps to restructure or refinance – a moratorium.

The directors would retain control over the company under the supervision of a ‘monitor’, whose role would be to safeguard creditors’ interests. Crucially, companies will still be able to access supplies, such as energy, raw materials and broadband, to allow trade to continue.

3. Restructuring plans

These can be used with or without the moratorium but essentially provide for a restricting proposal to be agreed by 75% of the company’s creditors (by value) but that would bind all of them.

While it is not a silver bullet to the economic challenges caused by the coronavirus pandemic, these proposals will allow directors a little more headspace in which to make difficult decisions regarding the future of their businesses and hopefully, avoid knee jerk reactions caused by the current exceptional circumstances all businesses are faced with.