The Corporate Insolvency & Governance Bill extension of temporary measures but liability for wrongful trading to resume

In light of the ongoing Covid 19 pandemic and its economic impact, various temporary insolvency measures originally set out in the Corporate Insolvency and Governance Act 2020 (CIGA) and due come to an end on 30 September 2020 have been extended.

Extension of Temporary Measures

Extended until 30 December 2020:

• The prohibition on presenting winding-up petitions based on statutory demands.
• The restriction on presenting winding-up petitions based  on the ground that a company is unable to pay its debts as they fall due, unless the creditor can establish that the inability to pay, is not linked to the Covid 19 pandemic.  I have previously discussed how the courts interprets this restriction.
• The relaxation of concerning the requirement to hold AGM physical meetings, these meeting can continue to take place telephone or video conference and shareholders remain able to vote remotely.

Other measures have been extended until 30 March 2021, namely:-

• The temporary exclusion of small suppliers from the restrictions on terminating supply contractors for insolvency. 
• The relaxed entry requirements for the new statutory moratorium under Part A1 of the Insolvency Act 1986 introduced by CIGA have also been extended to 30 March 2021. These temporary relaxations include a waiver of the requirement that a company seeking a Part A1 moratorium has to make a court application if they are subject to a winding-up petition; and that the company seeking a Part A1 moratorium has not been the subject of an insolvency procedure or a Part A1 moratorium in the previous 12 months.

Wrongful Trading

Notably the suspension of liability for directors under the wrongful trading provisions set out in the Insolvency Act 1986 has not been extended and will come to an end on 30 September 2020.

Under the wrongful trading provisions directors can be held personally liable for debts incurred after the point, when the directors knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration, unless the court is satisfied that they took every step with a view to minimising the potential loss to the company’s creditors. 

The test of when the directors ought to have concluded that insolvent liquidation or administration is both objective and subjective. The test is based on the general knowledge, skill and experience that may reasonably be expected of directors carrying the same functions are the directors subject to the wrongful trading claim, as well as the actual knowledge and skill and experience of those directors have. 

Where a company trading in financial difficulties, the directors must therefore ensure that they hold regular board meetings at which they discuss the company’s ongoing trade and carefully document their reasons for concluding that insolvent liquidation or insolvent administration is not unavoidable. It also means that the directors must ensure that the company takes steps to minimise the potential loss to the company’s creditors during this period.

Directors who are concerned about a financial position of their company should seek early legal advice and guidance from their accountants on the balance sheet position and cash flow solvency of their company.  Where the directors fear that insolvent liquidation or administration cannot be avoided or that it is likely that this cannot be avoided, they should seek urgent advice from an insolvency practitioner.

Moving Forward

Petra van Dijk is an Associate Solicitor in Spratt Endicott’s Dispute Resolution practice, specialising in contentious and non-contentious insolvency. Contact Petra on pvandijk@se-solicitors.co.uk.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation. This article is accurate at time of publication on 30th of September 2020.