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COVID-19 – Urgent need to amend insolvency laws

Images by Gareth Jones

Despite the financial assistance offered by the Government to businesses thus far, the pandemic threatens to cause many corporate and individual insolvencies across the UK.

The reforms suggested to Government include a moratorium on winding-up petitions against companies and suspending rules on wrongful trading in order to afford more protections for directors.

The immediate need for company directors to call in administrators has been alleviated by measures announced in the last week, including the deferral of VAT payments and a suspension on commercial property evictions for non-payment of rent.

The option of ‘furloughing’ staff and having 80% of their wages paid by the coronavirus jobs retention scheme has provided further relief.

However there remains an urgent need to remove creditors’ ability to present winding-up petitions, possibly with a 90-day grace period, to be triggered by directors stating; “the company is facing temporary liquidity or operational challenges as a result of circumstances related to Covid-19″.

The existing ten-day moratorium period within which company directors can file a notice of intention to appoint administrators could also be extended.

This would provide a reasonable period within which to put measures in place to overcome the temporary liquidity problem.

The rules around wrongful trading, which can lead to directors being personally liable for the debts of their companies, also require some relaxation.

Directors should not be made liable if, acting reasonably, they misjudged the potential negative impact of COVID-19 on their business. In particular they should not be exposed to personal liability for incurring any indebtedness under the emergency borrowing arrangements provided by or supported by the Government to assist in this crisis.

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