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Corporate Insolvency and Governance Act — a word of caution for directors

Uncertainty’s still on the cards for businesses as the UK faces a rise in coronavirus cases and talk turns to additional restrictions.

With that in mind, the extension of temporary measures, including to statutory demands and a company moratorium for restructuring put in place by the Corporate Insolvency and Governance Act 2020, may well prove welcome.

Interestingly though, there’s no extension for wrongful trading.

Wrongful trading

Directors’ personal liability under the Insolvency Act 1986 for wrongful trading was, in certain circumstances, suspended earlier this year. This was designed to prevent businesses from entering insolvency processes purely because of COVID-19.

Effectively directors could continue trading throughout the pandemic, even if the business was technically insolvent, in the hope that it would become profitable again once the storm passed.

This temporary suspension came to an end on 30 September.

So things now revert to the old definition under the 1986 act and the impact of wrongful trading can be dire.

Directors face personal liability for creditors’ claims if the view is ultimately the company should have stopped trading earlier. As such, they should be careful not to incur liabilities where there’s no reasonable prospect of paying them or of avoiding insolvency.

Moratorium extension

Unlike wrongful trading, some of the company moratorium measures introduced by the Corporate Insolvency and Governance Act (CIGA) have been extended to 30 March, 2021.

These are designed to give businesses breathing space to explore rescue options.

However, somewhat incongruously, regulations terminating some of the earlier measures were tabled around the same time as the ones prescribing extensions.

And that created some confusion.

Under the extension regulations, companies subject to an insolvency procedure in the previous 12 months can apply for a moratorium.

Some temporary provisions came to an end on 30 September 2020.

From now on, the proposed monitor must confirm the moratorium is, in their opinion, likely to result in the company’s rescue as a going concern.

Previously the test was qualified by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus”.

In short, the “coronavirus exception” has been removed.

The modifications don’t however apply to moratoria that are in force, or had been applied, before 1 October, 2020.

In the middle of what continues to be a fast-moving situation, the advice to directors is to tread carefully. And, as ever, when insolvency is a real possibility, seeking advice sooner rather than later is best.

Tim Thomas

Partner Tim specialises in commercial litigation and is highly experienced in a range of commercial disputes in Scotland’s sheriff courts and the Court of Session. He also works with clients dealing with businesses going through formal insolvency processes.

Posted, 05 October 2020 by Tim Thomas
Categories: Bankruptcy and insolvency law | Coronavirus | Coronavirus and insolvency | Insights