Yesterday, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy gave the government’s daily briefing to the press. Among other things, he announced that there would be a temporary relaxation to insolvency laws, designed to give company directors more time to “weather the storm”.
He said the overriding objective was to help companies that need to undergo a financial restructuring or rescue process so they can continue trading. The government recognises that the continued supply of goods and services is critical to the economy, over and above the measures already announced – see my previous articles about the Coronavirus Job Retention Scheme and the Coronavirus Business Interruption Loan Scheme.
Perhaps the biggest announcement, and yet the one that many people don’t really understand or haven’t really absorbed, was a temporary suspension of the wrongful trading rules, backdated to 1 March.
And why is that a big deal?
Wrongful trading is a criminal offence and can have serious implications on company director(s). So, what is wrongful trading? Wrongful trading happens when the director(s) of a company conclude, or should have concluded, that there is no real prospect of the company avoiding insolvent liquidation – legal speak for not being able to meet your obligations when they fall due. When this decision by the director(s) happens, or should have happened (ignorance is not an excuse!) the director(s) have a duty to protect the interests of creditors. They are no longer running the business for the benefit of the shareholders, but to ensure that the creditors are treated fairly and get paid. It’s a big shift, and there are some very complex laws here. Secured creditors (like the bank or other lenders) will be at the top of the pile, but everyone must be treated fairly. Any attempt to single out one or more creditors and pay them, to the detriment of the others, is unlawful.
Failure to reach this decision and to stop trading has a real sting in the tail. The courts have the ability to order director(s) to pay money from their personal assets into the company to protect and reimburse the creditors. The courts can also ban the director(s) from acting as a director for up to 15 years. In the most serious cases the director(s) can be imprisoned. Make no mistake. This is serious stuff. Relaxing these rules will give businesses the opportunity to trade out of the storm that Covid19 is unleashing upon all of us.
We’ll need to see the detailed wording, but for many businesses struggling to pay their bills over the coming days, weeks and months, this is an important respite.
In other news, the Secretary of State confirmed that Companies House will grant a 3-month extension of the filing deadline for annual accounts if you’ve been affected by the Coronavirus. I’ve now done this for several clients and it’s super easy. Click here and it will take you to a special login page on Companies House. Enter the company number, give them your email address, tick the box saying you’ve been affected by the Coronavirus and presto. You’ve got another three months to file your accounts.