Amongst many changes the government is being forced to consider is a reform to insolvency laws, particularly around wrongful trading.
Under the Insolvency Act 1986, it is a criminal offence for directors to continue trading when they know the company is unable to pay its debts; however, the Department for Business, Energy and Industrial Strategy is considering a possible suspension to those laws in an effort to prevent businesses from entering insolvency processes purely because of COVID-19.
Company directors are rightly concerned as to what the Insolvency Act means for them and their duties to creditors. Given the unprecedented situation most businesses find themselves in due to the lockdown, many will be balance sheet insolvent.
The government has however made it very clear that its priority is employees and the protection of business. A relaxing of the legislation would give directors comfort that they can continue to operate their business while using (where possible) the rescue packages being offered by the government, despite the balance sheet position.
The Insolvency Service, which sits within the Department for Business, Energy and Industrial Strategy is expected to move quickly. Other measures under consideration include a temporary moratorium for businesses going through a restricting process, during which they cannot be placed into insolvency by creditors.
As with everything COVID-19 related, watch this space for further updates from the government.
“The wrongful trading rules are scaring directors because they are worried if they carry on trading now while everything is so uncertain, they’ll be prosecuted,”