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Stressed companies can keep trading

David Fleming

David Fleming

For many company directors, the proposed changes to UK company law announced on 27 March that enable companies undergoing a restructuring/rescue process to continue trading are a welcome relief.

While the announcement provides limited details, we know that it will include the temporary suspension of wrongful trading provisions, along with other moratorium measures.

For many otherwise viable businesses, it provides vital time to make maximum use of the many government support packages, enabling firms to trade through the coronavirus crisis.

Business Secretary Alok Sharma MP said in his announcement: “Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.”

Amongst the measures announced, companies will be able to continue buying supplies, including raw materials, while attempting a rescue.

In addition, wrongful trading provisions are temporarily suspended retrospectively from 1 March 2020 for three months.

This last provision is important for company directors so they can continue to make decisions to save their businesses without the threat of personal liability.

The two core areas outlined by the Business Secretary included:

  • Wrongful trading: The temporary suspension of wrongful trading provisions for company directors to remove the threat of personal liability during the pandemic, applied retrospectively from 1 March 2020. The current wrongful trading rules have caused concern for many directors, given the risk of personal liability if they fail to take steps to minimise potential losses to creditors once there is no reasonable prospect of avoiding an insolvent liquidation/administration. This in turn may have required directors to commence insolvency proceedings prematurely.

This does not alter the steps that a director should take when assessing the financial health of the business. Despite this change, directors will remain subject to scrutiny. The rules pertaining to the directors' disqualification regime and laws on fraudulent trading remain firmly in place.

Directors must continue to act responsibly and do all they can to reasonably protect value for creditors and minimise loss. Further, they should take every step possible to continue to trade in accordance with their wider duties as directors.

From a practical perspective, directors will need to continue to record and minute decisions they are making during this period with rationale to avoid future misinterpretation.

A focus on how the creditors are being protected during Covid-19  should be referenced to demonstrate the steps directors are taking.  

  • New restructuring plan and moratorium: In August 2018, the government announced plans to introduce new restructuring procedures. The government intends to fast track these plans which would give UK companies an initial 28-day moratorium period to formulate a rescue plan or restructure. It would also aim to protect the companies supplies, be binding, and provide the ability to accept new funding during the moratorium period.

Currently, an administration process can provide protection via the use of a moratorium or a small company CVA, although both result in a formal insolvency process, and all the negative aspects associated with these restructures. 

New legislation providing short-term protection from winding up petitions or other creditor actions would be welcome while a solvent restructuring plan is drafted and agreed with supporting forecasts.

The key difference during Covid-19 is that there have been viable and profitable businesses lose revenues overnight, and they are struggling to control the monthly cash flow and losses.

A period to formalise a plan to support during the Covid-19 lockdown would protect businesses and likely provide better outcomes to creditors and supply chains, when compared to the other insolvent options. 

However, there are practical implications such as how you protect the access to supplies during this period, the impact to the asset based lending market on the funding of the supplier invoices, and the knock on to the credit insurance market.