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The UK Government announced on Saturday that it would change insolvency laws to give companies and directors some extra breathing room in dealing with problems brought on by Covid-19.

There is to be a suspension of wrongful trading rules in relation to directors along with a series of reforms to be fast-tracked to give companies “breathing room” in the face of financial difficulties.

Relaxation of wrongful trading rules

Wrongful trading laws make it an offence for a company director to allow the company to continue to trade if they know the business is unable to avoid going into liquidation. Many directors are undoubtedly extremely worried at the moment given the unprecedented financial difficulties arising from Covid-19 and the resulting lockdown.

The Government are to suspend wrongful trading rules for a period of three months, with retrospective effect from 1 March 2020. Directors should therefore have some comfort that they can continue to run their businesses, including paying staff and suppliers, despite concerns that the company could become insolvent.

Directors should however be aware that they will still be subject to their normal duties as a director and where they have concerns about these duties, or insolvency in particular, professional advice should be sought without delay.

Insolvency Reforms

The government is also proposing to fast-track other reforms to insolvency law including introducing:

1. A moratorium or “breathing space” for a company in financial difficulty to give it time to explore options for rescue;
2. A prohibition on enforcement of termination clauses in contracts to ensure that businesses can continue to obtain supplies in this period; and
3. The introduction of a new stand-alone restructuring procedure that can be used to bind dissenting creditors.

These changes have been mooted before and have been the subject of consultation for a number of years. We await the legislation setting out the detail of the changes which is to be introduced “at the earliest opportunity”. Again, any company concerned about insolvency should seek professional advice about their options.

If you need any advice on insolvency issues, please contact Philip directly at philip.gordon@edwardsandcompany.co.uk.

If you need advice on directors’ duties please contact Sarah Burrows at sarah.burrows@edwardsandcompany.co.uk.


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