The North East chair of insolvency and restructuring trade body R3 has given a broad welcome to government plans to help struggling businesses make it through the Covid-19 pandemic by introducing new tools for business rescue.
Secretary of state for business, energy and industrial strategy Alok Sharma brought forward significant changes to the UK’s corporate insolvency framework to help businesses that are unable to meet their debts due to the impact of the coronavirus avoid having to file for insolvency.
The new tools include a short business rescue moratorium to protect companies from creditor action while they consider their options, a new court-based restructuring tool modelled on an existing measure (the English Scheme of Arrangement) and new rules to prevent suppliers from cancelling contracts with businesses in an insolvency procedure.
But while supporting the overall intention of what will be permanent additions to the UK’s corporate insolvency and restructuring framework, Alexandra Withers, who is an associate solicitor in the insolvency department of Short Richardson & Forth Solicitors, has highlighted the insolvency profession’s concerns over the temporary suspension of wrongful trading rules, announced alongside the new tools.
Wrongful trading regulations make it an offence for a company director to continue to trade if they know the business is unable to avoid insolvency.
Their suspension has been brought in to allow directors to continue to pay staff and suppliers in order to keep the business going without being personally liable for any ‘breach’ that occurs.
However, many members of the insolvency and restructuring profession fear that a blanket suspension could risk abuse as the provisions are there for a reason and protect creditors.
Legislation covering the changes is to be brought forward at the earliest opportunity and will, once passed, be backdated to the beginning of March.
Alexandra Withers says: “The UK has a world-leading insolvency and restructuring framework, and the new restructuring tools in this package give our profession more options to help businesses navigate COVID-19 disruption. We’re pleased the Government has listened to the profession’s feedback and is focused on making these new tools accessible for the businesses that need them.
“The profession does, however, have some serious concerns about the Government’s plans to suspend wrongful trading – the provisions are there to protect creditors and a blanket suspension could risk abuse.
“The details of how exactly the suspension and these tools will work are still to be fleshed out, and it’s important that, as the Government works on the details, it listens to creditors, including lenders, the wider business community and in particular landlords on how they will be affected by the moratorium.
“Until the changes are formally introduced, insolvency professionals will continue to use the wide range of existing tools we have at our disposal to help restructure businesses and rescue jobs.
“We do understand that directors may be worried about the consequences of continuing to trade amid the COVID-19 disruption if they’re missing debt payments, but good advice from an insolvency practitioner or insolvency lawyer will remove their risk of facing a wrongful trading action.”