More COVID changes to corporate insolvency law?

SA Law’s Corporate Recovery & Insolvency experts look at options for the government’s ongoing efforts to support businesses through the pandemic

The government’s continuing economic response to the pandemic has already seen the furlough scheme extended to 30 April 2021 and there are signs that it may be considering pushing out some of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) – see our article on its introduction.

Wrongful trading

One of the CIGA’s headline measures was to relax directors’ potential liability for wrongful trading under s. 214 of the Insolvency Act 1986 between 1 March 2020 and 30 September 2020. That liability was suspended again and we are now coming to the end of the further suspension which started on 26 November 2020 and is due to expire on 30 April 2021.

The relaxations aimed to give directors some certainty and confidence around their potential personal liabilities as they traded companies through what was expected to be, and was, a very challenging period. They allowed directors (and members of LLPs) to avoid personal liability in a liquidation (or administration) if they continued to trade when they knew, or ought to have concluded at some point before the liquidation (or administration) started, that there was no reasonable prospect of avoiding either process.

With large parts of the economy still closed and the knock-on commercial effects of lockdown being felt widely across the whole economy the government has laid draft regulations before Parliament to extend its powers to use parts of CIGA by a further year. If passed they will allow ministers to make further amendments to the insolvency regime up to 29 April 2022.

Any future changes could encompass more than wrongful trading but as this area has received specific attention so far it would be surprising if it didn’t do so again as part of any package aimed at supporting business through the economy’s long-awaited reopening when current lockdown regulations start to be eased.

Return of statutory demands and winding-up petitions?

It also remains to be seen whether CIGA’s restrictions on the use of statutory demands and winding-up petitions will be continued using any new powers. These have probably had the most significant effect on protecting companies from creditor action and anecdotal evidence suggests that there may be a wave of demands and petitions from frustrated creditors in April if the current ban is not extended beyond its 31 March 2021 expiry.

Until then……

We will be watching and commenting on any developments in this area but for now directors must remember that whatever happens in relation to wrongful trading, all their other duties and obligations, including any given to lenders under personal guarantees, remain in full force and effect. They should also keep a weather eye on a potentially difficult creditors and ensure work with them to minimize the risk of potentially destabilizing (and commercially fatal) steps being taken if the government opts not to extend current protections.

Update

Since the publication of this article, the restrictions on the use of statutory demands and winding-up petitions have been extended to 30 June 2021. The suspension of liability for wrongful trading, as well as the exclusion of small suppliers from the prohibition of terminating supply contracts for supplier insolvency, have both been pushed out to the same date.

Debtors and creditors have strong arguments for and against further extensions. It remains to be seen whether another extension can be justified in the summer, so businesses should prepare for a return to 'normal' from 1 July. If your business is carrying debt that could be demanded in July, you should take steps to avoid what could result in a significant shock if demands are served.

As a company director, if you have given personal guarantees (PGs) to any aggressive creditors, you should also consider steps to protect and manage your position. Personal guarantees may well become a more attractive target for creditors than a company debtor insulated by government protection.

CONTACT SIMON

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Simon Walsh on 01727 798085.

© SA LAW 2021

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.