COVID – 19 New Insolvency Laws During The Virus

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Monday 6th April, 2020

COVID – 19 New Insolvency laws during the virus

Saturday the 28th March was met with even more announcements for businesses in relation to the COVID – 19 crisis. Business Secretary Alok Sharma announced changes to the insolvency regime to continue to answer to the Governments overriding objective in helping the UK companies that need to undergo a financial rescue or restructuring process, to keep trading. The announcement by Alok Sharma gives these firms extra time and space to weather the storm and be ready when the crisis ends whilst ensuring at the same time, creditors get the best return possible in the circumstances.

The changes to the insolvency regime announced by Mr Sharma include:

  • a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
  • protection of their supplies to enable them to continue trading during the moratorium;
  • a new restructuring plan, binding creditors to that plan;
  • key safeguards for creditors and suppliers to ensure they are paid while a solution is sought; and
  • a temporary suspension of wrongful trading provisions with retrospective effect from 1 March 2020 to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency without the threat of personal liability should the company ultimately fall into insolvency.

Supplying to businesses

So far, it seems like the Government will extend the existing essential supplies regime under sections 233 and 233A of the Insolvency Act 1986, this proposal was made by the City of London Law Society. Currently, insolvency provisions prevent suppliers for utilities, in respect of gas, water electricity and other goods where the sole purpose of that supply is for the business to be able to function or facilitating anything to be done electronically, from terminating or threatening to terminate supply under a supply contract unless the business pays its arrears.

Wrongful trading

Directors have expressed concern of personal liability for wrongful trading during the Coronavirus crisis.

Wrongful trading is a statutory offence under section 214 Insolvency Act 1986. Once a company's directors conclude, or should have concluded, that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company's creditors. A director failing to comply with this duty can be ordered to contribute to the company's assets.

This section, means directors who continue to trade when they know, or it is believed they should have known that their company becoming insolvent then put themselves at risk of being held personally liable for its debts. Suspending this section due to the Coronavirus crisis is to ensure that businesses can continue to trade through during this crisis.

There are also announcements to follow on an extension to moratorium protection for companies that are currently undergoing the restructuring process, enabling companies with more flexibility during COVID 19.