“COVID-19 – Changes to insolvency laws”

“COVID-19 – Changes to insolvency laws”

Tuesday, March 31, 2020

Robert Kay, Dispute Resolution Partner

The UK government has announced changes to insolvency laws to assist businesses who may be in difficulties as a result of the disruption and uncertainty caused by COVID-19. The changes will provide extra time and opportunities for businesses to try to “weather the storm”.

In a widely anticipated move, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy, has announced that the wrongful trading provisions under the Insolvency Act 1986 (“the Act”) will be suspended for three months in the first instance, but may be extended if needed. The legislation will be brought in “at the earliest opportunity”, and shall apply retrospectively from 1 March 2020, but the precise timing is uncertain as Parliament is currently in recess until 21 April.

Under section 214 of the Act, a company director risks personal liability and may be required to pay compensation if the company goes into insolvent liquidation and the Court concludes that the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration. Until now, this created additional uncertainties and pressures for businesses trying to survive the cumulative effect of the restrictions put in place to tackle the pandemic throughout the UK: businesses that borrowed additional funds (including those made available by the government) potentially exposed directors to personal liability if the business then ultimately entered administration or insolvent liquidation.

Interestingly, the changes apply for all companies – not merely those affected by Covid-19. Whilst there is the potential for abuse from directors of companies that were already vulnerable, the fraudulent trading provisions under section 213 of the Act continue to apply. Thus, a business that carries on with intent to defraud creditors or for a fraudulent purpose, faces the prospect of action against directors or others who knowingly continue the business.

Further support for business is likely to follow, and it may be that, for example, the minimum debts for serving statutory demands – on both businesses and individuals, will be raised (for example, Australia has increased the threshold significantly as well as increased the time for compliance from 21 days to six months).

Despite the changes, it remains advisable for directors in any doubt to take professional advice and document their decisions to help demonstrate proper considerations, including the interests of creditors.

If you require advice on insolvency or any dispute resolution matters, please get in touch with Robert Kay, a Partner in our Dispute Resolution team.

Please note – this article does not constitute legal advice.