Updates to the Insolvency Act 1986 in the COVID-19 Pandemic

Wrongful Trading

Section 214 of the Insolvency Act 1986 deals with the offence of wrongful trading. Once a director concludes (or should reasonably have concluded) that there is no reasonable prospect that the company will avoid an insolvent liquidation / administration, they have a duty to take every step that a reasonably diligent person would take to minimise potential loss to the company’s creditors. If, following the company going into liquidation / administration, the English courts decide that a director has failed to comply with this duty, the court can order the director to make a personal contribution to the company’s assets in the sum it thinks appropriate.

However, Alok Sharma, the Business Secretary, has recently announced that this offence will be suspended retrospectively from 1 March 2020 for three months. The precise terms of the new legislation which will implement this have not yet been published.

The existing laws in relation to fraudulent trading, antecedent transactions and the threat of director disqualification will continue to apply. It will remain an offence for a person to knowingly carry on a company’s business with intent to defraud creditors or for any fraudulent purpose.

Moratorium during restructuring

A new restructuring plan and moratorium have also been announced, which include a temporary moratorium for companies which are undergoing a restructuring process to continue trading, during which time debts cannot be enforced by creditors. These plans, which will be implemented by new legislation, will also enable UK companies to bind dissenting creditors to a new restructuring plan. There is little detail on precisely what will be included in the legislation in the government’s announcement, but it builds on previous potential reforms which were announced in August 2018.

In summary, the August 2018 plans proposed a new moratorium being available to all solvent companies to allow them time to consider restructuring options. A UK company would be eligible to apply for the moratorium if it was not yet insolvent (and so able to carry on business and meet current obligations and expenses during the moratorium) but would become insolvent if action was not taken. The company must, on the balance of probabilities, have the prospect of coming to an arrangement or compromise with its creditors. This would be determined by an independent monitor, who would be a licensed insolvency practitioner.