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Insolvency law relaxed to help virus-disrupted companies

Business secretary Alok Sharma has given companies disrupted by the coronavirus breathing space to explore options for rescue or restructure and help them avoid insolvency.

2nd Apr 2020
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Official portrait of Alok Sharma
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On 28 March the business secretary announced new restructuring tools to the existing UK insolvency framework and temporarily suspended the wrongful trading provisions retrospectively from 1 March 2020 for three months.

Sharma said that these changes would enable companies to continue buying supplies, such as energy, raw materials or broadband, while attempting a rescue.

“Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their companies going,” said Sharma.

As part of his insolvency package, the business secretary introduced three new tools to the UK’s insolvency framework:

  • a moratorium for companies giving them respite 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; and
  • a new restructuring plan, binding creditors to that plan.

The guidance also pointed out that safeguards are in place to ensure creditors and suppliers are paid while a solution is sought.

These new restructuring procedures have been in the pipeline since the government announced plans in August 2018 to strengthen the insolvency framework.

Wrongful trading

The suspension of the wrongful trading rules will come as a relief to directors grappling with the impact and uncertainty the coronavirus outbreak has placed their business.

This new legislation will see directors through 1 March 2020 to 31 May 2020, and the business secretary has the option to extend that period even longer if the crisis continues to intensify.

The existing wrongful trading rules had caused concern for directors, as they would have been personally liable if they knew there was no reasonable prospect of avoiding insolvent liquidation or administration. With the crisis serving an economic blow across many sectors and businesses, directors had still been reluctant to take out the loans to cushion the damage of COVID-19.

However, the government is still enforcing the existing laws against fraudulent trading and the treat of director disqualification as a deterrent against misconduct.

Reaction

The British Chamber of Commerce (BCC) welcomed the government’s steps to amend insolvency rules.

The BCC’s head of economics Suren Thiru said: “It is right that the rules on wrongful trading are temporarily suspended to ensure that directors are not penalised for doing all they can to save companies and jobs during this turbulent period.

“Companies that were viable before the outbreak must be supported to ensure they can help power the recovery when the immediate crisis is over.”

Although the business community was largely supportive of the announcement, AccountingWEB columnist Richard Murphy was not as forthcoming with praise and said the changes will “save a few directors whilst leaving the economy as a whole to sink”.

“Protecting one company cannot be at cost to the viability of another; that makes no sense at all,” Murphy said on his blog. “This measure seems to assume that we are still operating in a world where business failure is an exception and not the norm. That is not the world we live in any more: business failure is now systemic and not particular.”

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