With the involuntary closure of many businesses forced by the UK wide lockdown, previously successful companies are beginning to feel the strain, becoming more and more concerned with the future viability of their businesses.
Many businesses simply do not have the income or cash reserves to pay their creditors at this time. This is not due to a failure of their business plan or a lack of demand, but simply because the economy has been driven to a dramatic and unprecedented halt as a result of Covid-19.
On 30th March 2020, the Government announced proposed amendments to existing insolvency laws, setting out a number of measures designed to give businesses breathing space, so as to enable them to better weather this storm.
The proposals include:
- A disapplication of the wrongful trading provisions, for a period from 1st March 2020 for three months. As with the other proposals that have been outlined, we will not know the exact parameters of what is intended until such time as the new rules are issued. However, it would certainly appear that that the Government has, in contemplation, a scheme whereby directors of a company that subsequently enters insolvency will not be held liable (as they otherwise would be) for any additional shortfall to creditors incurred within that period.
- Measures to prevent creditors seeking to put a company into administration or forcing it into liquidation, where that company is taking steps to restructure or refinance – a moratorium. The directors would retain control over the company, under the supervision of a ‘monitor’ whose role would be to safeguard creditors’ interests. Crucially, companies will still be able to access supplies, such as energy, raw materials and broadband, so as to allow trade to continue.
- Restructuring plans. These can be used with or without the moratorium but essentially provide for a restructuring proposal to be agreed by 75% of the company’s creditors (by value) but that would bind all creditors.
These proposals have not yet made their way into legislation but when they do, both companies and their directors will no doubt welcome them.
Whilst it is not a silver bullet to the economic challenges caused by the pandemic, these proposals will allow directors a little more headspace in which to make difficult decisions regarding the future of their businesses and hopefully avoid knee jerk reactions caused by the current exceptional circumstances with which all businesses are faced.
The key messages must be to seek advice and talk to customers, suppliers and employees. You and they will need support and advice if the business is to survive.