The government is racing to overhaul insolvency laws as the coronavirus pandemic threatens to unleash a deluge of corporate and individual bankruptcies across the UK.
Sky News has learnt that the Insolvency Service, which sits within the Department for Business, Energy and Industrial Strategy (BEIS), has begun canvassing views among restructuring professionals about urgent changes to company legislation.
The reforms, which would be implemented through emergency laws, could include a moratorium on winding-up petitions against companies, and suspending rules on wrongful trading in order to afford more protections for directors, according to industry sources.
“The government is also considering what emergency legislation could be introduced to help struggling businesses, and we are very grateful to our stakeholders that have taken time to get in touch and propose possible measures”, the Insolvency Service said in a notice to the profession.
“We are also working closely with other government departments on what measures short of legislation might help.”
The German government has already introduced emergency laws to ban winding-up petitions during the COVID-19 crisis.
Insiders said that business groups including the CBI and Institute of Directors were among those pressing for urgent reforms in the UK.
A degree of pressure on company directors to call in administrators has been lifted by government measures announced in the last few days, including the deferral of VAT payments and a moratorium on commercial property evictions for non-payment of rent.
One insolvency practitioner said there was unlikely to be an immediate deluge of companies collapsing into administration while they had the option of ‘furloughing’ staff and having their wages paid by the yet-to-be-launched Coronavirus Jobs Retention Scheme.
Nevertheless, he added, there was a need for imminent reform of laws to provide companies with more clarity as they navigate one of the most tumultuous periods in economic history.
In a paper submitted to the Insolvency Service by the insolvency law committee of the City of London Law Society – a copy of which has been seen by Sky News – the government was urged to remove creditors’ ability to present winding-up petitions, with the introduction instead of a 90-day grace period triggered by directors “stating that the company is facing temporary liquidity or operational challenges as a result of circumstances related to Covid-19”.
The paper also suggested that the existing ten-day moratorium period within which company directors file a notice of intention to appoint administrators should be extended.
“A reasonable period within which to put measures in place to overcome the temporary liquidity problem which [would] be less than the 90 day period of protection under the proposals made above in respect of winding-up petitions because companies who could not put such measures in place expeditiously would retain the ability to go into administration with a view to their rescue as a going concern,” it said.
Another key element of the lawyers’ reform proposals relates to rules around wrongful trading, which is a criminal offence.
In their paper, they argued that 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”.
It also raised concerns about the implications of criminal sanctions in new pensions legislation, which it said “might discourage companies drawing down on secured facilities if that could have the effect of having a material detrimental effect on the defined pension scheme if the company does not ultimately survive as a result of COVID-19”.
“While it may be that the directors and the lenders will have a ‘reasonable excuse’ in pursuing the secured lending, we wonder if this is the right time to be introducing such criminal sanctions,” the committee said.
The committee of lawyers sought to highlight the importance of enacting emergency legislation.
“If the short-term impact of Covid-19 is not satisfactorily countered, and viable businesses are not preserved, there will be lasting damage to the wider economy,” it said.
Whitehall sources said the government was likely to respond to the proposals from insolvency practitioners in the coming days.
The Insolvency Service declined to comment.
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