The Corporate Insolvency and Governance Act 2020 Explained – and What it Means for UK Business Owners

Alongside many of the economic stimulus measures and financial reprieves announced during the Coronavirus pandemic, the UK government has also introduced temporary measures relating to corporate insolvency.

The rules about winding up businesses are set out in The Corporate Insolvency and Governance Act 2020, which came into force in June.

In September, as it became clear that regular trading was not about to resume any time soon, the government extended the Act’s measures.

While the original Act was due to end in December 2020, it has now been extended further. Some of the rules are in place until March, and some until April 2021.

The Law Firm Group receives regular enquiries from struggling businesses that have been severely impacted by lockdowns and the pandemic crisis. As such, it is no surprise that insolvency proceedings and redundancies have been on the rise – and these measures are intended to support companies dealing with these unique pressures.

Here we’ll look a little closer at the Act, what it means, and what you as a UK business owner need to know.

How Long Have Wrongful Trading Liabilities Been Suspended For?

Wrongful trading is a serious scenario, and one of the common situations is where a director knows a business to be insolvent, and yet allows it to continue trading.

The issue here is that by failing to declare insolvency, the company is likely to take out credit it does not intend to repay, increasing potential losses suffered by creditors, and the directors fail to fulfil their fiduciary duty towards the shareholders.

However, in light of the tremendously difficult business climate caused by the pandemic, the government decided to suspend wrongful trading measures.

  • Initially, these measures came until effect until 30th September 2020.
  • While the measures have not been extended as such, a new suspension has been introduced from 26th November 2020 until 30th April 2021.

This does not mean that a company should continue trading under any circumstances. Directors could still be subject to legal scrutiny if they willfully allow reckless trading, and know they have no opportunity to recover a profitable position.

What it is intended to do is avoid unnecessary pressures, with UK businesses dealing with multiple issues:

  • Rent arrears and VAT deferrals.
  • The challenge of forecasting trading in such an uncertain environment.
  • Difficulty in securing affordable lending.
  • Time delays in receipt of discretionary grant funding.
  • Uncertainty about the end of the furlough scheme and recalling staff.
  • Concerns about potential breaches of financial covenants.

In short, provided they have done everything possible to uphold their statutory duties, a director will not be investigated on the grounds of wrongful trading during this suspension period.

You should note that the usual investigations in an insolvency scenario remain, as well repercussions for fraudulent trading.

Additionally, the suspension is NOT retrospective and therefore does not offer any exemptions from the Insolvency Act 1986 for actions taking place between 1st October and 25th November 2020.

What Other Changes Have Been Introduced That Impact Company Trading?

The focus of the suspension to wrongful trading is intended to help business owners focus all of their time, resources and efforts on continuing to trade.

If a business would be temporarily considered insolvent due to trading restrictions, and yet has the opportunity to resume regular business when lockdowns cease, and therefore bring their liabilities up to date, there is less chance of employee redundancies and business closures.

Alongside this, there is a range of other short-term rules:

  • Companies registered at Companies House have extensions to filing deadlines. These are offered automatically and do not have to be applied for. There have also been several extensions to payment deadlines and filing dates against corporate liabilities.
  • Businesses may hold virtual meetings, such as AGMs, to allow voting and decision-making to continue, when a physical meeting is not permitted, or advisable under safety guidelines. This measure was extended to 30th December 2020 and since extended further to 31st March 2021.
  • Creditors may not petition the winding-up of a business under statutory measures during this exemption period. They can only raise such a petition if they have reason to believe that the company has not been affected financially by Coronavirus, or would be unable to pay their debts even if the virus had not had any effect.
  • Exemptions to wrongful trading mean that businesses can continue their operations until March 2021. This moratorium period is intended to give them time to resolve financial issues without the threat of creditors’ enforcement action.
  • Landlords of privately rented commercial premises are prohibited from repossessing properties. This measure also runs until March 2021, and so a company cannot be evicted in this period per The Business Tenancies Regulations 2020.

While this package of measures is welcome news for many British businesses, it remains crucial to take action and consider a recovery strategy if you are facing potential insolvency.

There are several grant schemes and funding options, depending on your business’s size and sector. You can also access help with covering employee costs to retain staff and avoid redundancy scenarios that might be resolved when trading can resume.

Suppose you are concerned about your trading position. In that case, it’s also still important to consider your risk exposure as a director or business owner, and whether you can take steps to mitigate any exposure.

For example:

  • Convening board meetings to discuss whether ongoing trading is financially viable. Ensure all such discussions are minuted and recorded.
  • Make concerted efforts to draw up meaningful financial forecasts, even where so many factors may yet be uncertain.
  • Keep in contact with creditors and discuss repayment plans or schedules to reduce the debt amount.
  • Plan for contingencies, should insolvency become an unfortunate reality.

As a full spectrum legal practice, The Law Firm Group can provide professional support with your insolvency strategy or plan to resume profitable trading.

Our teams specialise in every facet of company law, from restructuring to maximise your business’s value for sale, to capitalising on any market opportunities that might restore your position.

We also offer solicitors with experience in commercial property, should you be facing a challenge around privately leased premises, and independent legal guidance through commercial borrowing processes.

If you’re unsure what support would be beneficial, but know that your business would benefit from an expert listening ear, do get in touch. We’ll work through your key challenges and business risks to draw up a future-proof strategy for recovery.

Call or email us to talk about it. 0300 303 3805

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