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Insolvency rules in the time of coronavirus

Linkilaw Company Law

The outbreak of the coronavirus has seriously affected the UK economy in recent weeks. Many businesses are being confronted with serious commercial considerations while others have been forced to stop trading altogether. On 28 March 2020, the Business Secretary Alok Sharma, provided a lifeline in the form of new insolvency measures to help those people and businesses that find themselves struggling financially.

In this article, we will discuss the meaning of insolvency, the rules surrounding it, and how those rules have temporarily been changed.

What is insolvency?

When a company is solvent, meets its financial obligations to creditors, and pays debts when they become due, directors must act in the best interests of the company and its shareholders. However, if the company fails to perform these obligations, then the company becomes “insolvent”, changing the scope of duties of its directors. In such cases, the responsibility of directors shifts to the company’s creditors and, in certain cases, employees.

Failure to do so generally qualifies as “wrongful trading” and may lead to a series of sanctions, including a disqualification for up to 15 years or even criminal penalties.

How have the insolvency rules changed?

In the wake of the coronavirus, there have been a few proposed changes to the previous insolvency rules to ease the stress on businesses.

The temporary suspension of wrongful trading, applied retrospectively from 1 March 2020, allows directors to continue trading, despite insolvency, without the threat of personal liability. This measure will continue for three months.

Another introduced measure is postponing lender action for companies who are approaching insolvency. This short pause (or “moratorium”) has been established to ensure that companies are not approached by their lenders while trying to restructure their debts or waiting for a business rescue.

Companies who are insolvent will still be able to access supplies (raw materials, component parts, etc.) in order to continue trading during the moratorium and remain financially afloat.

To ensure that lenders continue to be paid while the parties seek a solution, the government has provided a new restructuring plan with certain safeguards, the details of which are still being developed.

Bottom line

As we find ourselves in times of uncertainty, these new changes allow businesses to pause and plan how to continue operating in the future. From new access to essential supplies to continued trading, directors and companies should keep these new rules in mind while weathering this economic storm.

Written statements