What do recent changes in the insolvency framework mean for business directors and owners?

Our Corporate Finance Associate Partner, Lee Humble, recently caught up with Tonya Allison of FRP Advisory LLP to discuss the recent changes in insolvency guidelines, with some of the legislative movement becoming increasingly important to business directors during what remains a volatile period.

Recently changes to insolvency law has seen both temporary and permanent changes, with new measures directly impacting upon what directors and business owners should and shouldn’t be doing during a period where business viability is threatened.

The availability of a moratorium period is one permanent change which can be used to provide an initial 20 business day period for directors to pursue rescue plans, during which a degree of protection from creditor action can be provided. Any such mechanism must be monitored by an approved body or individual, most commonly a licensed insolvency practitioner, who must oversee trading activities and actions during the moratorium. During the period, all moratorium debts and identified pre-moratorium debts must be addressed, with liquidity monitored very closely throughout.

The return of the Crown Preference, initially set for earlier in the year, has now been postponed until 1 December, with this having direct implications for chargeholders (and ultimately unsecured creditors). Debt providers with a floating charge will see a potential dilution in their security therefore and is likely to have funding implications.  Personal guarantees could therefore become even more common and of increasingly values / proportions of overall lending quantum.

Temporary measures have also featured, with a raft of provisions in place until 30 September. These include a range of aspects with key areas being the suspension of winding up provisions, wrongful trading, statutory demands, and restrictions upon commercial landlords in the recovery of rents payable.

All of these measures are intended to provide businesses with a period in which to respond to COVID-19 with the ultimate goal of minimising corporate insolvency, albeit a watchful eye will remain with a view to capturing any abuse which may follow. It will be key for directors to avoid any action which could expose them, often personally, due to defrauding of creditors, misfeasance, preference, undervaluing of transactions or fraudulent trading.

Our advice to any business with immediate liquidity and viability challenge is therefore to continue to act in good faith and in line with your general responsibilities as directors. Regardless of any ultimate action, insolvency led or otherwise, it will be vital that you keep your financial records up to date and document any action taken by you and your fellow directors. Communication will be central to this and the engagement of your advisors could prove to be an extremely wise move.

Contact us

For further advice, please contact Lee Humble at lee.humble@taitwalker.co.uk.