There have been increasing concerns in recent weeks that UK insolvency law does not accommodate the short-term impact of COVID-19 on many businesses. In response, the Business Secretary announced on 28 March that the UK's insolvency rules would be amended as part of the Government's wider business support package. Whilst the measures that the Government intends to implement have not yet been fully detailed, this note summarises what has been announced so far and what we might expect, based on the Business Secretary's comments.
Suspension of wrongful trading
The Government has announced a temporary suspension of wrongful trading rules for company directors to remove the threat of personal liability, applying retrospectively from 1 March 2020. It is not clear yet whether there will be any criteria in order to benefit from the suspension of wrongful trading.
This measure would temporarily suspend the provisions of the Insolvency Act 1986, under which directors must, if they consider a company has no reasonable prospect of avoiding insolvent liquidation or administration, take every step to minimise loss to creditors. This very high standard is difficult to meet in the current climate and, without this suspension, if directors decide to continue to trade when there is no such reasonable prospect, they currently face personal liability for the net deficiency caused to the company's creditors from the point where they should have realised that there was no reasonable prospect.
Importantly, the Government noted that all other "checks and balances that help to ensure directors fulfil their duties properly will remain in force". In particular:
- there will be no change to directors' duties more broadly, including the duty under s172(3) of the Companies Act to act in the interests of creditors when a company is insolvent;
- fraudulent trading rules under the Insolvency Act are not suspended; and
- the director disqualification regime will continue to apply.
Directors should continue to be mindful of, and take advice on, their duties in the current circumstances in order to avoid potential liability for breach of duty or misfeasance.