Changes to the UK Insolvency Rules

For additional guidance, please refer to Steptoe's COVID-19 Resource Center.

Given the material impact that coronavirus is having on businesses, on March 28, 2020 the government announced that legislation would be forthcoming amending UK insolvency laws to:

1. Temporarily suspend wrongful trading rules for three months beginning from March 1, 2020 under the Insolvency Act 1986 so that directors are not personally liable for seeking to save companies and jobs during the pandemic. Without suspension of these rules, if a company were to go into an insolvent administration or liquidation and at some point before then a director knew or ought to have realized that there was no reasonable prospect of avoiding the insolvency, he may be made liable to contribute to the assets of the company: the quantum of liability is at the court's discretion but is assessed by reference to the liabilities incurred and loss to creditors caused by the director's actions (or inaction) after the point at which he knew or ought to have known that there was no reasonable prospect of avoiding the insolvency. This liability is called liability for wrongful trading and is dealt with in the Insolvency Act 1986.

2. Provide a temporary moratorium for businesses undergoing a restructuring process, during which time they cannot be put into administration by creditors and will continue to be able to trade.

The purpose of these rule changes is to alleviate potential cash flow issues for directors and provides companies with time to carry out business during this pandemic whilst ensuring creditors obtain the best return given the circumstances.

Existing Checks and Balances to Remain in Force

Existing checks and balances that help to ensure directors fulfill their duties properly will remain in force and therefore act as a deterrent against director misconduct. Directors must be careful not to treat the new measures as an opportunity to act without considering their fiduciary duties. Legislation in relation to fraudulent trading and director disqualification remain in place. Directors must seek appropriate professional advice to ensure that they remain within the new rules and do not fall foul of measures relating to the misapplication of company money or property whilst taking into account their fiduciary duties.

Any proposed action by liquidators will require these new rules to be considered before taking any action against directors. 

Timing

We understand that the legislation to reflect the above rule changes will be introduced to the UK Parliament at the earliest opportunity. The legislation will have retrospective effect from March 1, 2020.

The government has yet to confirm whether it intends to bring forward any further changes to the insolvency rules whilst this pandemic is impacting businesses.