Insolvency laws are to be shaken up to prevent struggling companies being forced to file for bankruptcy because of problems caused by the coronavirus pandemic.
New legislation was introduced in parliament on Wednesday to temporarily suspend wrongful trading provisions — at least until June 30 — allowing directors to continue trading without the threat of personal liability.
Wrongful trading entered UK insolvency law in 1986, making it an offence for a company director to continue to trade if they know the business is unable to avoid going into liquidation.
The Corporate Insolvency and Governance Bill will also ease regulatory requirements so companies can delay annual general meetings until late September or hold “closed AGMs” online. They will also be allowed to communicate with members electronically and delay Companies House filings, such as changes of director or annual returns.
The measure will suspend the use of statutory demands — written demands from creditors — and winding-up petitions where the pandemic has prevented a company paying its bills. Instead such petitions must be first reviewed by a court. These changes will continue until at least the end of June.
The Department for Business, Energy and Industrial Strategy, which put forward the legislation, said it would protect otherwise viable companies from collapse.
Mark Phillips QC, an insolvency expert, welcomed the measures. “Everyone can now focus on how best to restructure debts and rescue struggling companies,” he said.
The German and Australian governments have already introduced laws to make it harder for creditors to companies to file winding-up petitions during the coronavirus crisis.
The UK government will bring in three permanent measures through the bill.
It will enable a “company moratorium” whereby struggling companies will be given formal breathing space for 20 business days, extendable to 40 days, to pursue a rescue plan without creditors being able to take a legal action.
It will also change termination clauses in supply contracts so that when a company enters an insolvency or restructuring procedure its suppliers cannot use contractual terms to stop supplying or put up prices.
And it will enable companies in financial difficulty, or their creditors, to form a “restructuring plan”, which dissenting creditors would be forced to sign up to if it is sanctioned by a court as “fair and equitable”.
One insolvency practitioner said this measure, known as the “cross-class cram down” would have administrators to companies “jumping for joy” because it means that, for the first time, a small group of minority creditors do not have the power to stop a restructuring process at a large company.
Jonathan Geldart, director-general of the Institute of Directors, which pushed for the changes, said the bill would provide “some reassurance” that those who act responsibly will not be caught out by the insolvency system.
Many industries have been struggling in recent weeks despite government interventions, such as new loan programmes, VAT deferral and the furlough job support scheme, after the lockdown brought ordinary life to a halt.
Figures from the Insolvency Service show that in April 2020 there were 1,196 company insolvencies in England and Wales, 17 per cent lower than during the same month last year. This drop, during the early weeks of the lockdown, was in large part due to fewer court hearings at which winding-up petitions are presented, less enforcement activity by HMRC on companies that owe tax payments and delays by both Companies House and insolvency practitioners.