While announcements have been made, and measures extended, to help corporate Britain, directors faced with the difficult decision of whether to trade on through the crisis could suddenly be very exposed once again.
As previously discussed in our articles here and here, the Corporate Insolvency and Governance Act 2020 (CIGA), introduced a number of temporary measures to seek to avoid an avalanche of insolvencies during the coronavirus crisis, including:
- restrictions on statutory demands and winding up petitions for the period from 27 April to 30 September.
- the suspension of directors' personal liability for wrongful trading from 1 March to 30 September.
In addition, the provisions of the Coronavirus Act 2020 prevented landlords from using a right of re-entry to bring a business tenancy to an end on the basis of non-payment of rent (Relief from Forfeiture).
Alongside government backed coronavirus loan schemes (CBILS, CLBILS and Bounce Back Loans) (Loan Schemes), plus the Coronavirus Job Retention Scheme (CJRS, or furlough), the temporary relief measures have successfully avoided widespread insolvencies to date. They have been so effective that they have in fact supressed the normal rate of insolvencies one would expect to see in a growing economy, to the extent that corporate insolvencies in August were only 56% of last year's figure.
30 September represented a cliff edge, with the temporary measures under CIGA and Relief from Forfeiture due to end, with CJRS ending a month later, and the deadlines for the various Loan Schemes also falling around this period.
But, there has been some good news:
- As noted by our colleagues in our real estate disputes team Relief from Forfeiture has been extended to 31 December
- Now, the restrictions on statutory demands and winding up petitions which were due to expire have also been extended to 31 December 2020
- In addition, the deadline for applications for the Loan Schemes has been extended to 30 November, with the repayment terms loosened
- The Chancellor has announced, after significant opposition pressure, a new Job Support Scheme to soften the blow of the end of CJRS which will see employees earn up to 77% of their salaries.
All of this is welcome and helps businesses, but while these measures have deferred a crisis, assets and cash reserves are diminishing, they do not solve the problems that are continuing to build. Loans will need to be repaid and balance sheets and creditor positions are deteriorating. The fact that creditors are restricted from taking action will provide only provide temporary comfort. It is not a complete solution. In this context, directors will be very conscious of the fact that there has not been any extension to the suspension of liability for wrongful trading. As previously discussed back in April, directors may be personally liable for wrongful trading if:
- A company has gone into insolvent winding up or administration (i.e. a formal insolvency process (administration or liquidation) in which creditors will not be repaid in full)
- At some time before the commencement of the winding up or administration the directors knew or ought to have concluded (based on both the general knowledge, skill and experience that may reasonably be expected of the directors carrying the same functions as the directors in question and the actual knowledge skill and experience of those directors) that there was no reasonable prospect that the company would avoid going into insolvent winding up or administration (the 'Reasonable Prospect Test')
- After such time, they failed to take every step they ought to have taken with a view to minimising the potential loss to the company's creditors.
A director found liable for wrongful trading may be ordered to contribute to the company’s assets for the benefit of creditors. The contribution will normally be the amount of the reduction in the company's assets available for creditors arising after the time when the company did not pass the Reasonable Prospects Test.
Tom Pringle, Restructuring and Insolvency partner at Womble Bond Dickinson said that:
"As things stand, while creditors will be effectively prevented from forcing an insolvency for the rest of the year, the pressure is now very much back on directors to consider their duties. They are facing a renewed risk of personal liability, and now is the time to take advice as to their options and duties, while help is still available and immediate threats are suppressed".
The challenge of addressing the ever mounting debt piles of businesses once the temporary relief measures fall away lies ahead and businesses in distress should use this time to consider the restructuring options available. R3 the Association of Business Recovery Professionals has echoed this sentiment in its response to the recently announced changes (found here).
As for winding up petitions and forfeiture, they join Brexit as a looming crisis in January – directors need to be prepared.