During the last few weeks we have seen big names including Flybe, Carluccio’s and BrightHouse enter administration. Debenhams has entered into urgent talks with landlords regarding rent cuts and rent and service charge holidays in an attempt to save some of its stores. These talks will likely result in Debenhams entering into a second CVA, previously entering into a CVA in 2019.
The coronavirus crisis has had an impact on businesses of all sizes in various industries. At this uncertain time it is difficult for businesses to know what steps they should be taking to protect their business as much as possible and when/if they should be looking at insolvency procedures. We hope this article can provide you some guidance on the practical steps you can take during this crisis.
Changes to insolvency legislation
On 28 March 2020 the government announced that emergency changes would be made to the existing insolvency legislation including:
- A temporary moratorium if a business is undergoing a restructuring process;
- Suspension of wrongful trading legislation for the duration of the crisis (retrospective from 1 March 2020); and
- New rules to ensure companies get supplies and raw materials (not just companies that have entered into insolvency proceedings).
This will provide some comfort to directors during this time. Under the current wrongful trading legislation a director can be personally liable if the company has gone into insolvent liquidation and, at some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
The legislation regarding fraudulent trading and directors’ disqualifications is likely to remain as it is. Under the fraudulent trading legislation, a person (not just a director) can be personally liable if in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose.
The government has not yet provided a date for these changes but said they would be made at “the earliest opportunity”.
Delays to winding-up and bankruptcy petitions
Additionally, winding-up and bankruptcy petitions scheduled for hearing from 25 March 2020 have been largely adjourned until June 2020.
Practical steps directors can take during this time
- It is important for directors to ensure they continue to comply with their directors’ duties as set out in Companies Act 2006, namely:
- Duty to act within powers;
- Duty to promote the success of the company;
- Duty to exercise independent judgment;
- Duty to exercise reasonable care, skill and diligence;
- Duty to avoid conflicts of interest;
- Duty not to accept benefits from third parties; and
- Duty to declare interest in proposed transaction or arrangement.
- If a company is insolvent, directors’ duties extend to the creditors, so it is important to bear this in mind if your company is facing difficulties.
- Ensure regular board meetings are run with up-to-date financial information and all decisions are accurately documented. There are many virtual conferencing facilities available so that board meetings can be held remotely from directors own homes, in order to comply with the social distancing guidelines set by the government. It is important to ensure that your company’s Articles of Association do not prevent board meetings being held remotely. We would also recommend that all directors are given appropriate notice and give their express consent to the meeting being held in this way, the arrangements are such that everyone can hear everyone else and that the board minutes are sent round to all directors afterwards for approval.
- It is important to ensure the financial position of the company is under constant review to ensure there is enough cash flow in the business. The government has announced many new measures over the last few weeks to assist businesses, such as grants and the Coronavirus Business Interruption Loan Scheme. Please refer to the article ‘My business has been affected by coronavirus, what support is available to me?‘ which details some of the new measures that have been proposed/introduced.
- HMRC have also set up a helpline for businesses and individuals and are offering deferral of payment of VAT and can set up Time to Pay arrangements in relation to tax. This may assist with cash flow.
- If you are unable to pay debts or loans, it is important to talk to any creditors before defaulting in order to see if you can come to some arrangement at this time such as a payment holiday or setting up a payment plan.
- Equally, customers may ask the same of your business and therefore it is important to discuss this with customers early on and not rely on debts being paid on time.
- The government have set up the Coronavirus Job Retention Scheme, in which the government will pay up to 80% of the wages for any retained workers who are not actively in work but are still on the payroll. It is important to consider if any of your employees fall into this category as you may be able to benefit from this.
- If you are unable to file your company accounts in time due to the current crisis, ensure you apply to Companies House to extend the filing deadline before the original deadline. Failure to do so could result in late filing fines and possible director prosecutions.
- Although suspension of wrongful trading law will provide some individual protection to directors, it is important for directors to be careful with the transactions they enter into during this time. If the company ends up insolvent, transactions the company has entered into over the last two years will be reviewed in order to determine any of the following:
- Transactions at an undervalue;
- Extortionate credit transactions;
- Transactions defrauding creditors; and
- Misfeasance (note: a director may be personally liable whether or not they have financially benefitted from the transaction).
- If your company is facing difficulties, you are unsure of your duties or you just want general advice on restructuring your business, it is important to seek appropriate advice from an insolvency practitioner or legal adviser at the earliest opportunity.
It is important for all businesses to be proactive and adaptable during this extremely difficult time. Our Insolvency and Restructuring Team and Company Team are happy to assist you, should you require any assistance during this time.