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Changes to the Insolvency Scheme during COVID-19

On Saturday 28th March the Business Secretary Alok Sharma announced changes to the insolvency regime in order to allow those UK companies weakened by the current pandemic to continue trading when faced with possible concerns over their solvency.

The Business Secretary has temporarily suspended the Wrongful Trading provisions contained within S214 of the Insolvency Act. In suspending the provisions it is intended that companies will be able to maintain trading whilst continuing to purchase goods from their suppliers. The logic behind the approach is remove directors from the threat of legal actions for failing to discharge creditor liabilities as and when they fall due. Clearly every care should be taken when considering withholding payment from a supplier and in the absence of any form of guidelines to be followed, directors would be wise to consider that only where creditors have publicly stated that payments can be withheld, can nonpayment be taken as read. This would include, HMRC, Rents etc. In all other cases, Directors should negotiate and agree with suppliers the terms upon which goods are being bought and keep a record of such discussions.

The Wrongful Trading provisions will be suspended retrospectively from 1 March 2020 for a period of 3 months but may be suspended for longer if required.

As there is very little by way of supporting guidance or criteria for businesses available at this point, we advise businesses to operate with a degree of caution, having in mind that creditors will need to be repaid.  At this point legislation has not yet been enacted to bring about these changes, with the Business Secretary stating it would be brought forward at the earliest opportunity.  Parliament is currently in recess until 21 April 2020.

Existing legislation surrounding fraudulent trading and director disqualification remain in force as do the many sections of the Companies act regarding the expected behavior of Directors.

We would encourage any directors with concerns about their company to contact us for advice at the earliest opportunity: