Reed Smith Client Alerts

Business Secretary Alok Sharma has announced that the government will be introducing measures to “improve the legal options for companies running into major difficulties. The overriding objective is to help UK companies, which need to undergo a financial rescue or restructuring process, to keep trading. These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends”.1

Authors: Mandip Englund Patrick Schumann Edward J. Estrada Volker Kammel Diane Roberts Nicholas Williams Peter S. Clark

holding hands

The temporary amendments to the insolvency laws which are being considered include:

  • Suspending the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during the crisis, without the threat of personal liability should the company ultimately fall into insolvency.
  • Limiting creditors’ ability to present winding-up petitions and introducing a moratorium against creditor action where the company is facing temporary challenges as a result of the COVID-19 crisis.
  • Enabling companies to continue buying essential supplies such as energy, raw materials, or broadband services.
  • Extending the 10-day moratorium which arises upon the filing by directors of a notice of intention to appoint administrators.

The precise wording of the amendments is yet to be confirmed. In a press release dated 28 March 2020, the government stated that legislation to implement these amendments would be introduced in Parliament at the earliest opportunity, including provisions to enable the changes to be extended if necessary.2

This follows the example of Australia, which has relieved directors of their duty to avoid wrongful trading for a period of six months, meaning that they will not incur personal liability with respect to debts incurred in this period. European countries whose regimes contain a mandatory filing obligation have introduced, in addition to various support measures, limitations on the requirement to place companies in insolvency proceedings. For instance, the duty to file for insolvency has been suspended in Germany until 30 September 20203 and in Spain until the end of the state of emergency declared by the Spanish government.4

The suspension of the wrongful trading rules would represent a significant relaxation of the UK’s insolvency regime given that its introduction in the Insolvency Act 1986 was seen as one of the most important tools to improve the protection available to creditors. The wrongful trading remedy enables the courts to impose unlimited personal liability on directors of an insolvent company who fail to take all steps to minimise losses to creditors at a time when they knew, or ought to have concluded, that the company could not avoid insolvent liquidation. Such a step may often include ceasing to trade so as to avoid incurring further liabilities.