Alan Meek: Government changes to UK insolvency law

Alan Meek, partner and head of corporate insolvency and restructuring at Morton Fraser, discusses the UK Government’s changes to UK insolvency law.

Alan Meek: Government changes to UK insolvency law

Alan Meek

A press release from the Department for Business, Energy and Industrial Strategy (“BEIS”) on March 29 2020, has indicated that the Government intends to amend insolvency law to “give companies breathing space and keep trading while they explore options for rescue”.

The BEIS press release does not give much more by way of detail. However the notes to the release state:-

“Current insolvency rules stipulate that directors of limited liability companies can become personally liable for business debts if they continue to trade when uncertain about whether their businesses can continue to meet their debts. Relaxation of these wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.

“Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity. Provisions will be included to enable the changes to be extended if necessary.”

The proposal was welcomed by Matthew Fell, chief UK policy director, Confederation of British Industry, who said: “The temporary suspension of wrongful trading provisions…will give much-needed headroom for company directors to enable otherwise viable businesses to use the government’s support package and weather this crisis.”

Although we will have to wait to see exactly what form any relaxation of the wrongful trading rules take, it is clear that the Government is alive to the concern that business owners may decide that the risk of carrying on in business at the present time is too great.

The wrongful trading provisions (s214 (for companies) and 214A (for LLPs) of the Insolvency Act 1986) are intended to ensure that when directors know or should know that insolvency is the likely outcome for their business, they should take steps to ensure that the ensuing loss to creditors is minimised.

If they don’t do so, then the directors may be held personally to contribute to the shortfall to creditors in the insolvency. Often the most appropriate course of action in those circumstances would be to cease trading as soon as possible and put the company into administration or liquidation.

It is clear that in the current economic climate, many businesses face a highly uncertain future and many may be facing months without any income whatsoever while still accruing liabilities.

Ordinarily one would envisage that the reaction of most of the controllers of those businesses would be to cease business and appoint a liquidator or administrator.

For the UK, given the numbers involved, that would be a disastrously high price to pay and would cause huge damage to every aspect of our society. It would almost certainly act as a severe brake on the speed of economic recovery when things begin to get back to normal.

Changes to insolvency law however need to be carefully considered because they always involve a balancing act. For every winner out of a change in insolvency law, there must a loser; and normally any changes would be the product of much consideration and consultation. But these are not ordinary times and to fend off a spate of damaging and irreversible insolvencies it is obviously considered that the damage that some creditors will undoubtedly suffer as a result of a relaxation of wrongful trading rules is a price worth paying.

There is every likelihood that some unscrupulous delinquent directors will look to take advantage of this change. For example, a company that is currently facing insolvency may decide to over order stock on credit, sell it, and bank the proceeds to reduce personal guarantee liabilities. Quite how such abuse could be prevented if there is no wrongful trading sanction is not obvious.

Whatever the changes say when they are enacted, care must be taken to avoid giving a free pass to those who seek to take deliberate advantage of any change.    

Read all of our articles relating to COVID-19 here.

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