Business insolvency due to covid-19
New insolvency measures to support businesses under pressure as a result of the coronavirus outbreak have been announced.
These new measures will include a moratorium for companies against creditor action while they seek a rescue or restructure, protection of a business’ right to purchase supplies (including electricity and broadband) to allow companies to continue trading during a moratorium, a new restructuring plan which would bind all creditors, and a suspension of wrongful trading provisions for three months from 1 March 2020.
Together with the other support on offer such as the Coronavirus job retention scheme, deferred dates for VAT and self-assessment payments, business rate holidays and the Coronavirus Business Interruption Loan Scheme it is hoped that many businesses which would otherwise be forced into insolvency during this crisis will be saved by these measures.
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In normal times, the wrongful trading provisions allow a company’s administrator or liquidator to seek a court declaration requiring a director to make a personal contribution to the assets of the company, thereby benefiting creditors.
The court will grant this declaration if it believes that the director continued to trade despite the fact he knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation or administration.
Often, it is the fear of personal liability for wrongful trading that convinces directors to wind up their businesses.
By suspending the wrongful trading provisions, the government is releasing directors from this personal liability. This is to be welcomed, as it means directors will not face financial ruin for failing to predict the prospects of their companies in these uncertain times. This will hopefully prevent a huge number of unnecessary insolvencies, and allow viable companies to recover quickly once normal trading resumes.
We do not know precisely how the government intends to suspend the wrongful trading provisions, and we likely won’t find put until parliament returns from its Easter recess in late April. However, the intention of the announcement was to give directors of otherwise viable businesses the confidence to continue trading through the coronavirus crisis.
The business secretary also announced a moratorium for businesses which need to undergo a financial rescue or restructuring process.
Currently small businesses (those with fewer than 50 employees, turnover of less than £10.1 million and less than £5.1 million of assets on their balance sheets) can seek a moratorium when proposing a Company Voluntary Arrangement. Additional moratoria applying to more businesses and insolvency situations have been suggested for some time, and it seems the government intends to move forward and expand upon measures which were already in the works. We will know more once parliament returns.
We do not know precisely what form these new measures will take, but the intent is clear: to keep businesses afloat by preventing directors from believing that they are under a duty to stop trading.
At Gannons, we have the experience to guide and assist should you need advice about how to navigate your way through these extraordinary times. Please do contact us.
Director duties where a business may be insolvent
One thing the new covid related insolvency measures will not do is release directors from their fiduciary duties to act in the best interests of the company or, in an insolvency situation, its creditors.
The general duties a director owes to their company are:
- To act within powers.
- To promote the success of the company.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare an interest in a proposed transaction or arrangement.
The importance of communication
To avoid compounding business difficulties caused by the coronavirus, good communications and good strategy are essential. Good communication helps to avoid disputes and this ought to include communication between directors, communications between directors and shareholders and also with creditors. Strategy is also important – the terms of existing contracts should be considered, the possibility of renegotiating contracts and bank borrowing facilities and the viability of restructuring.
Practical actions to assess the solvency of your business and protect yourself as director
- Obtain legal and financial advice – this will demonstrate that you have taken prudent actions and sought external, professional advice to guide difficult assessment of whether your business is solvent and viable.
- Regular board meetings – document discussions and decisions and keep detailed minutes.
- Dialogue with creditors, lenders, suppliers and customers – review contracts, loan agreements and be proactive in determining whether your suppliers or customers might be likely to default on contracts or orders with your business or may be insolvent themselves.
- Be aware in more detail about the terms if your contracts.
Should you close your company or business?
Getting good advice early can make all the difference in some scenarios. Whilst your business may not be technically insolvent today, it seems likely that the coronavirus crisis will impact business significantly for months to come.
The chances of suppliers or buyers becoming insolvent and not delivering or paying you may be high. Supply chain problems which you anticipate will happen could foreseeably make your business insolvent.
There are generally 2 ways of determining whether a business is insolvent – the cashflow test and the balance sheet test. Whilst it looks like the cashflow test will be relaxed by the Government during the pandemic, business owners would still keep in mind the balance sheet test and review on an ongoing basis considering whether present assets exceed present and reasonably expected future liabilities.
There may be some options to consider now such as pre-pack administration which might allow you to start up again. Such options are unlikely to be as practicable or possible without careful consideration now of your solvency position going forward and good planning. We can help.
Gannons, as specialist commercial lawyers offer agile, practical and highly experienced service to assist in dealing with business difficulties. We’d be happy to talk to you.