April 23, 2020
Mark Rostron shares insights into the proposed changes and some practical tips for those with concerns to the future of their company.
Some businesses may seek to trade through the lock-down period and trade out of the difficulties following lifting of the restrictions. Others may seek to hibernate during this period and attempt to pick up where they left off at a later date.
The two main proposals are:
1. Variation of the wrongful trading provisions
Currently s.214 of the Insolvency Act 1986 provides that if in the course of a winding-up it appears that:
a.) if at some time before the commencement of the winding-up that the director at the time, knew or ought to have concluded that here was no reasonable prospect that the company would avoid going into insolvent liquidation, or entering insolvent administration; then
b.) the Court may order that director to make such contribution (if any) to the company’s assets as the Court thinks proper; but
c.) the Court shall not make such a declaration, if the director took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken.
As things stand s.214 presents an obvious risk of personal liability to director(s), to contribute to the company’s assets in a liquidation, if the company continues to trade through these difficult times and fails.
Unfortunately, the detail of the proposed legislative changes to wrongful trading is not yet available, but from Government announcement it appears that there will be a suspension of potential liability for wrongful trading for a fixed period with retrospective effect from 1 March 2020 for all companies and not just those affected by COVID-19. A period of three months has been speculated; however, the following points will need to be considered:
the length of the lock-down is a moveable feast at this time;
even when restrictions start to be lifted it is likely that they will be lifted in stages;
once all restrictions are lifted there will still be a period of flux and uncertainty as businesses attempt to pick up the pieces.
2. Introduction of a new moratorium (or stay)
This will allow companies a breathing space to:
seek professional advice as to rescue or restructuring strategies; and
purchase essential supplies to facilitate continued trade during the period of the moratorium.
No detail is available yet, but it is expected to be a readily accessible process perhaps commenced by filing a prescribed notice at court and giving notice to the company’s creditors.
Whilst the above changes may provide some certainty for directors trading through these very difficult times, other directors’ duties and legislative provisions remain unchanged which could result in exposure to personal liability for directors, for example:
Directors’ duties to creditors and misfeasance
Transactions at undervalue (s.238 Insolvency Act 1986)
Preferences (s.239 Insolvency Act 1986)
Liability under Company Directors Disqualification Act 1986
If you are continuing to trade and you:
are increasing the company’s debt, and/or
are coming under creditor pressure, and/or
have concerns that your company is insolvent or heading towards insolvency, or
just have general concerns as to the future of your company and its business…
…or your business is hibernating and you have general concerns as to the future. It is imperative that you seek professional advice. In the first instance, consider seeking advice from a qualified insolvency practitioner. If precipitate steps are recommended by the first adviser (e.g. creditors’ voluntary liquidation or administration) consider seeking a second opinion before proceeding.
We will be providing further updates, as and when they are provided.
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