In the new world of insolvency, nothing stays the same for long. Having issued regular updates on the effect of COVID-19 on the solvency of businesses, hard on the heels of Brexit and zombie companies, the one question that has come up most often in the last week is “what are directors supposed to do, given the uncertainties ahead?”
It’s a fair question, amongst many others.
If a company becomes insolvent, the director’s duties switch to the creditors, to ensure that they do not suffer detrimentally by the management taking the business over the cliff, rather than stop trading to minimise their losses. The implications for directors that plough on once the point of no return is reached are severe; not only potential liability for wrongful or even fraudulent trading under the Insolvency Act, where a director can be ordered to contribute to the shortfall to creditors, but also potential disqualification as a director for a lengthy period under the Company Directors Disqualification Act.
The dilemma facing directors at this unprecedented time cannot be underestimated.
Many businesses face a steep, possibly complete decline in income, with customer demand reduced or non-existent, supply chains decimated, cash drying up but with costs remaining constant. We have seen help from the government in many forms, such as the furloughing scheme for staff, financial assistance for the self-employed, cash loans, business rates holidays, deferring of tax payments and restrictions on landlord evictions. The message from the centre has been hang on in there, we will help you through this.
Such an approach is understandable. If high numbers of businesses crash now, the economy will be in tatters, taking many years to recover. Alongside this approach, all winding up and bankruptcy petitions will now be adjourned until June 2020, the courts not wanting to hear these cases remotely. The wolf at the door, in the form of a creditor’s petition, does not go away, but it won’t get entry. At least, not yet.
But the decisions facing the management of businesses in the UK are nevertheless grave. They may be able to carry on for the foreseeable future, or to mothball for a period of time, but what happens on the other side? What happens if the business is no longer viable, has to be liquidated and, worse still, the creditor position has worsened in the interim? It would be tempting for the cautious director to say let’s call it a day now.
The government has thought about this current scenario in the boardrooms and does not want an epidemic of insolvencies now. They want businesses to bounce back. Accordingly, the Business Secretary Asok Sharma has announced new measures to help businesses “emerge intact the other side of the Covid-19 pandemic”. There will be a temporary suspension of the wrongful trading rules, which will apply retrospectively from 1 March 2020. Whilst the detail is yet to be seen, this should mean that when a liquidator is assessing claims for wrongful trading (and, one assumes, disqualification for unfitness), the core period of COVID-19 will be disregarded. This should remove the fear directors may have of continuing in these tumultuous trading times and to give vital breathing space.
This should stop the spike in insolvencies that would be so damaging to the economy. But it does no cure the problems with customers and supply chains, which may be terminal. Or the banks, landlords, councils, trade creditors and, of course, the government from seeking satisfaction of their debts in the longer term. It also doesn’t provide businesses that are fundamentally non-viable with a Lazarus moment, or the unscrupulous director with a free pass to take advantage of these temporary relaxations.
Despite the government providing some further reassurance in these challenging times, for directors and management the advice must remain the same.
If you have any concerns about the solvency of your business and want to consider its restructuring or cessation, get professional advice sooner rather than later.