UK Government to Temporarily Suspend Wrongful Trading Provisions in Response to Covid:19
On 28th March the Business Secretary, Alok Sharma, announced several new measures to help businesses through the financial impact of Covid:19 so they can emerge in-tact once the crisis is over.
15 April, 2020
He said the Government’s overriding objective is “to help UK companies which need to undergo a financial rescue or restructuring process to keep trading. These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends.”
Measures include a number of additions to the UK’s corporate insolvency framework:
- a business rescue moratorium to protect companies from creditor action while they consider their options;
- a new court-based restructuring tool; and
- new rules preventing suppliers from cancelling contracts with businesses in an insolvency procedure.
And significantly, there is to be a three-month suspension of the wrongful trading provisions to give directors the confidence to use their best endeavours to continue to trade during the pandemic, without the threat of personal liability, should their attempts to save the company ultimately fail. The suspension will be applied retrospectively from 1st March 2020.
“The government will also temporarily suspend the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency, without the threat of personal liability should the company ultimately fall into insolvency…Existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.”
– BEIS Statement
Further details of the suspension will become clear when the proposed bill is tabled in Parliament after the Easter recess.
From a turnaround and rescue perspective, we don’t think the suspension affects the key question that needs to be asked when a company is deciding whether or not to continue trading; ‘what are the business’s realistic prospects?’. The advice turnaround and rescue professionals should be giving directors remains the same: that it is fine to continue to trade, even if the business is insolvent, so long as the prospects of saving the company are good. This advice hasn’t changed as a result of the new legislation.
So while the proposed measures do not distinguish between businesses that were struggling prior to the Coronavirus pandemic and those whose financial performance has been affected only by the pandemic, it should be made clear that the suspension is not a lifeboat to keep afloat companies that were already in difficulty prior to the onset of the pandemic.
The suspension will not allow previously unviable companies to limp on without the threat of personal liability because those that do will be held to account in eventual insolvency proceedings.
From TMA UK. Article produced by Kickstart PR.