UK ditches wrongful trading insolvency laws
The UK’s wrongful trading law will be suspended to allow businesses to “weather the storm” of the coronavirus pandemic, business secretary Alok Sharma has announced.
The change, backdated to apply from 1 March 2020, will allow directors of companies to pay staff and suppliers even if the company is facing insolvency.
Other measures include 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 access raw materials, the Financial Times reports.
The announcement seeks to alleviate concerns that borrowing additional funds offered by the UK government could place a director at risk of personal liability.
Under current legislation, if a director continues to trade a business whilst it is technically insolvent, the director may be liable for wrongful trading if the business enters administration or insolvent liquidation, and by continuing to trade the net deficiency to creditors’ increases.
The offer of government funding had placed directors in a difficult position, as taking out loans to save the business could have resulted in personal liability if the business fails.
Last week, after mounting criticism, high street banks backtracked on loan requirements which insisted that business owners provide personal guarantees for government-backed loans.
Announcing the move, Mr Sharma said: “Our overriding objective is to help UK companies which need to undergo a financial rescue or restructuring process to keep trading.
“These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends, whilst ensuring creditors get the best return possible in the circumstances.”
However, he added that “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”.