Legal Blog

The financial impact of the Coronavirus Crisis

| Apr 08, 2020

It is inevitable that most, if not all, businesses will experience financial difficulties through this pandemic, as a result of forced closures and social distancing measures. On 28 March 2020, the Government announced a package of measures aimed to help struggling companies through the crisis.

Financial Measures

The package of financial measures to support businesses includes:

  • A Coronavirus Job Retention Scheme
  • Deferring VAT and Self-Assessment payments
  • A Self-employment Income Support Scheme
  • A Statutory Sick Pay relief package for small and medium sized businesses (SMEs)
  • A 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England
  • Small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief
  • Grant funding of £25,000 for retail, hospitality and leisure businesses with property with a ratable value between £15,000 and £51,000
  • The Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank
  • A new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans
  • The HMRC Time To Pay Scheme

In addition, HMRC has announced that for the time being, unless there is evidence of fraud, it will refrain from instigating winding-up and bankruptcy proceedings.

Insolvency Measures – suspension of wrongful trading provisions

The government also announced insolvency measures, including a temporary suspension of wrongful trading provisions. The suspension will apply for a period of three months, retrospectively from 1 March 2020 (with the possibility of extending if necessary).

Wrongful trading refers to the personal liability of a director of a company which continues to trade at a time where there the directors (should have) concluded that there is no reasonable prospect of their company avoiding insolvent liquidation. Continued trading after this moment in time, brings with it an obligation to take every step possible to minimise losses to creditors. If they fail to take these steps, then directors can be ordered by the court to personally contribute to the company’s assets.

However, the Government has emphasised that ‘all the other checks and balances that help to ensure directors fulfil their duties properly will remain in force’.  These include directors’ statutory and fiduciary duties, including a duty under section 172 of the Companies Act 2006 to take creditors’ interests into consideration at a time when a company is close to insolvency. Directors’ disqualification provisions also remain in place.

The Government’s announcement that the wrongful trading provisions are temporarily suspended is aimed to ensure that directors of companies which are struggling as a result of Coronavirus crisis can continue to trade these companies with the aim of emerging through this difficult and unprecedented period, without fear for personal liability if they continue to trade after a moment in time, when they ought to have concluded that insolvent liquidation was unavoidable.

Practical steps

However, it would appear prudent, particularly as it is not yet known how the relaxation of the wrongful trading provisions will be implemented, to continue to act, as if the wrongful trading provisions remain in place. This means:

  • Having regular board meetings and recording in writing the basis for any decisions to carry on trading and the prospects of surviving the crisis.
  • If the company is insolvent, recording on what basis the directors consider that insolvent liquidation or administration can be avoided. Will the company have access to any funding arrangements? Will any of the financial measures announced by the government assist in avoiding liquidation or administration?
  • What steps can be taken to protect the creditors’ position? In this respect it is also important to note that the duty to take creditors’ interest into consideration under section 172 of the Companies Act 2006 remains in force.

If in any doubt, directors should seek professional advice as to the extent of their duties and obligations under the existing (and once known revised) wrongful trading provisions and the law generally.

Insolvency Reforms

In addition, the government has stated that that it will shortly be introducing versions of the corporate insolvency reforms which were first proposed in 2016 and 2018. These reforms include:

  • A new business rescue moratorium : The new business rescue moratorium aims to give a companies in financial difficulty the opportunity to establish a rescue plan free from the threat of creditor enforcement. Currently a moratorium can only be obtained through the formal insolvency processes of CVA and administration.
  • A new restructuring tool: The new restructuring tool adopts some of the principles of the American 'Chapter 11' procedure, but actually most closely mirrors the current English 'Scheme of Arrangement'. The new tool will allow a company to bind all its creditors to a restructuring plan, including groups of dissenting creditors.
  • Prohibition of 'termination clauses' in insolvency: This reform aims to address the challenge faced when rescuing businesses, namely that that suppliers use clauses in contracts which allow them to stop supplying a company in an insolvency procedure. However, the proposed prohibition will not impact suppliers’ ability to terminate contracts on any other grounds.

The Government is yet to legislate on these announcements, so exactly how they will take effect remains to be seen.

Next steps

We have seen the Government announce an unprecedented range of measures to support businesses and business owners through the current crisis to minimise the economic impact that they feel.

Although this article gives an overview of some of these meausres, it does not comprise an exhaustive list and the government guidance is frequently updated. We advise that you seek legal advice for more information on any of these measures and how they may affect your business.

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-law.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.