he UK government is eyeing urgent changes to insolvency laws to prevent companies unable to meet debts due to the impact of coronavirus from being forced to file for bankruptcy.
The Department for Business, Energy and Industrial Strategy canvassed insolvency and restructuring experts this week on a possible suspension of wrongful trading laws and new measures to protect retail and hospitality groups forced to stop trading because of the government’s nationwide lockdown, according to two people familiar with the matter.
The Insolvency Service, which sits inside Beis, is expected to introduce reforms rapidly. Other potential measures being discussed include a temporary moratorium for businesses undergoing a restructuring process, during which time they cannot be put into administration by creditors. The talks were first reported by Sky News.
“There is a lot of pressure on the government to get changes through quickly to stop all of the businesses that are hit hardest by coronavirus from entering into an insolvency procedure,” said a person close to the discussions. “They are considering what tools and levers they have available, but also changes to mechanisms that are currently in the insolvency regime.”
Wrongful trading was introduced into UK insolvency law in 1986 and makes it a criminal offence for a company director to continue to trade if they know the business is unable to avoid going into liquidation.
“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,” the person added.
A suspension or amendment of the existing law would protect directors during the pandemic, allowing them to continue paying staff and suppliers despite concerns the company could become insolvent.
Jonathan Geldart, director-general of the Institute of Directors, said the government should act quickly to amend wrongful trading laws to prevent “entirely preventable corporate collapses”.
“We’re calling on the government to prioritise jobs and business survival by relaxing existing insolvency obligations put on directors and thereby providing business leaders greater room for manoeuvre at this critical juncture,” he said. “We should not allow a single viable business to go to the wall because of this crisis.”
Retail groups, restaurants and airlines are among industries drastically cutting costs and halting tax payments to conserve cash and avoid bankruptcy in the coming months, as government measures to try and slow the spread of the virus in the UK has slashed consumer demand.
The package of financial support unveiled by Rishi Sunak, chancellor, last week provided some respite by allowing companies to defer VAT payments and stop paying taxes on property leases. There has also been a moratorium on commercial property evictions for businesses that miss rent payments.
Craig Beaumont, director of external affairs for the Federation of Small Businesses, welcomed the discussions. “These are not normal times,” he said.
The German and Australian governments have already introduced laws to make it harder for creditors to companies to file winding-up petitions during the coronavirus crisis.
Beis said it was “listening to our stakeholders in the insolvency industry about what additional measures could be taken to help businesses during Covid-19”.
(Published by Financial Times, March 26, 2020)
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