COVID-19: Insolvency
rules and directors’ duties

Advice for UK directors – applying the normal insolvency rules to the COVID-19 crisis.

UK companies and their directors are reviewing the impact of the Government’s actions to protect UK businesses from collapse, resulting from a breakdown in the supply chain, cash-flow challenges and resulting challenges to solvency.

Written by:
Jim Truscott

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Businesses are not paying all creditors, or are seeking to stretch creditor payments to protect cash. This is despite the availability of Government-sponsored financial support packages of an unprecedented scale, and reflects in part the challenges in accessing those packages quickly whilst managing cashflow.

Proposals which have just been announced are intended to give temporary breathing space to businesses, notably by means of:

  • A temporary moratorium on winding-up petitions; and
  • A temporary suspension on rules of wrongful trading.

The detail behind these measures is expected in the coming days.

To give some colour to the position, our initial comments are as follows:

  • The proposals reflect a necessary relaxation in the face of supply-chain breakdown: businesses are not paying creditors.
  • Absent these relaxations, a company’s directors are duty-bound to consider creditors’ interests, if the business may not be viable, and to assess the ‘tipping point’ where they should stop trading – failing to do so raising the risk of a wrongful trading action personally against the directors
  • Cashflow remains the primary challenge for business at this time and these measures should allow at least an initial breathing space for a board to consider its position.
  • We anticipate business will require and lobby for an extension to the initial 3-month period applicable to these measures (backdated to 1 March and expiring on 31 May) – further and permanent changes to the existing regime have been called for, reflecting the view that the business environment will have been changed permanently by the COVID-19 crisis.
  • The scope and detail of the proposals remains uncertain, with the effect that businesses are advised still to consider carefully the legal and practical/commercial ramifications of managing creditor payments – not every aspect of the legal insolvency regime will be relaxed.

Our corporate team is speaking to a number of clients to provide advice on these developments and is well-equipped to provide guidance and support.