30 Set A breathing space for companies
The Corporate Governance and Insolvency Act which came into force on 26 June 2020 brought some much needed relief for companies which were struggling to deliver business as usual in the face of Covid-19. The Act, which was only designed to be a short term measure, was broadly welcomed across the business spectrum with the FSB Chair calling it “an important step to helping many small firms during this crisis.”
Action has now been taken to extend some of the Act’s measures which were originally due to expire on 30 September. Whilst the extension to 30 December of permissions to hold virtual AGMs may help in some small way, it is the measures taken in respect of insolvency and wrongful trading which have taken the headlines.
With the aim of continuing to give companies a breathing space and to protect them against aggressive creditor action, the restriction on statutory demands and winding-up petitions has been extended until 31 December 2020. Alongside this key measure, supply termination clauses are still prohibited and small suppliers remain exempt from the obligation to supply until 30 March 2021. This, the Government say will help smaller suppliers to protect their business if necessary. The temporary relaxation of the rules in respect of the moratorium procedure has also been extended until 30 March 2021
One measure which has not been extended is that relating to a director’s liability for wrongful trading which still expires on 30 September 2020. The suspension of this legal obligation between March and the end of September was key to numbers of companies finding ways to trade through the pandemic, knowing that they could return to solvency once more normal trading patterns resumed. With this measure ending, directors now have a duty to cease trading if their company is facing insolvency. Moreover they may face financial or legal penalties if they continue to trade, knowing that their company is insolvent.
Commenting on the lack of extension of this key measure the Director of Policy at the Institute of Directors, Roger Barker, said: “The failure to extend this measure sends a bad signal to directors across the country, and risks opening the door to a wave of avoidable insolvencies” adding “The Government shouldn’t prop up companies that aren’t viable in the long term, but as we enter new restrictions, the definition of long-term viability is far from clear-cut.” Accordingly the IoD has called on the Government to extend this protection for directors until the end of 2020.