Insolvency Laws To Be Suspended?


Advice to Directors and Business Owners

The suspension of normal everyday life is having huge social and economic consequences. As businesses are shut down, mothballed or are simply creaking under the strain of dramatic falls in revenue, directors face at least two fundamental insolvency law problems.

Firstly by trading when they are unable to pay debts as they fall due, there is a risk that should the company eventually be wound up, they will face personal liability for wrongful trading.

Secondly that a creditor seeking payment which the company cannot meet could resort to winding up proceedings.

As it appears the Insolvency Courts will not be hearing petitions unless they can be in person (which obviously current restrictions will prevent), petitions could be issued but remain unheard for some months. Any disposition of company property is void from the date of presentation of the winding up petition to the date of any eventual winding up. As a result the mere issue of a petition could have the effect of bringing the company to its knees (it would be unable to trade, pay its staff and would see its bank account frozen). The directors' only recourse would be to seek a court order validating payment etc but the result would be uncertain, costly and it maybe doubted that the courts could deal with this influx of cases.

If the company were eventually to be wound up the conduct of the directors will be examined. Were they trading whilst the company was insolvent? Should they personally be ordered to pay compensation for the loss arising during that period of trading? Wrongful trading is fact specific and has both an objective and subjective test; what would a reasonable director do in the circumstances facing that director with the general knowledge, skill and experience that director has. A director in the middle of the current health and economic crisis is facing a challenge that is almost unimaginable. To have the fear of personal liability if it does go wrong must be especially unpalatable.

Normal business activity will be resumed, and Insolvency Law and procedures will be required to restructure business and regulate those who cannot survive. It may however be the case that a suspension of some of those Insolvency Laws may the best thing for the economy as a whole, and a way to prevent wholescale financial Darwinism.

P.S Since this blog was first published on 28 March the Government announced forthcoming measures which will see wrongful trading legislation suspended from 1 March for a period of 3 months.

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Directors are asking the government for a temporary indemnity that allows them to keep technically insolvent companies open during the Covid-19 crisis without fear of legal action.
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