FCA, FRC and PRA introduce welcome package of measures to help businesses and audit firms weather the COVID-19 storm
Last week and, again, on Saturday 25 March 2020, the government announced plans to introduce changes to current insolvency laws to ease pressures on UK businesses being caused by the global pandemic, COVID19. See latest announcement here.
Whilst we await sight of the specific terms of the draft legislation, amongst the changes announced, include:
Under s.214 Insolvency Act 1986 (“the Act”) an office holder can apply to court, during the course of the winding up of a company, for an order directing that a person who is, or has been, a director of that company be made personally liable to contribute towards the company’s assets.
The court may make such an order if:
However, the court will not make an order under s.214 of the Act if it is satisfied that after the person knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation that that person took every step he ought to have taken with a view to minimising the potential loss to the company’s creditors.
The threat of personal liability and s.214 proceedings is a powerful deterrent for errant directors and an option for the Office Holder to recover assets for the creditors, albeit a difficult one to use successfully.
Directors should not count their chickens just yet nor should an Office Holder be too disheartened that their powers have been temporarily weakened. Whilst s.214 claims may be suspended, conspicuous in their absence is the lack of clarity on the following:
The move to help businesses, and directors, genuinely struggling in these unprecedented times and ease the pressures of the threat of insolvency brought on through no fault of their own is to be welcomed. However, a relaxation of the laws should not come at the expense of creditors, nor should it prevent office holders from pursuing dishonest or malfeasant directors. The current crisis and suspension plans should not be used as a shield but operate to protect those who need it most, businesses staring down the barrel of insolvency they might otherwise have avoided but for Covid 19.
The absence of any clear announcement on relaxing other powers and claims available to pursue errant and dishonest directors is an indication that it is not the government’s intention. These are very much staying in place. The temporary suspension of s.214 claims is no “get out of jail free card” to directors. Directors thinking of dipping their hands in the till or belligerently ignoring the interests of creditors can, and should, still expect claims to be brought against them.
That said, is a 3 month suspension to s.214 really the best way forward to help our struggling businesses? There is already protection for directors caught in the danger zone of wrongfully trading whilst insolvent in s.214(3) to take “every step” to minimise the potential loss to creditors. Perhaps emergency legislation clarifying what these steps should be during the next couple of months might have been a more useful way of helping businesses and directors fearful of the risk of personal liability?
Whilst we still await sight of the draft legislation, the latest government announcement on 23 April (updated on 25 April) which can be read here suggests that, in addition to the changes outlined in my previous blog, the new Corporate Insolvency and Governance Bill, will contain measures preventing the issue of statutory demands and/or winding up petitions against companies where the failure to pay is as a result of COVID-19. There will be a temporary ban on issuing statutory demands between 1 March 2020 and 30 June 2020 and on presenting winding up petitions from Monday 27 April 2020 through to 30 June 2020. Those that are issued during this period will apparently be voided.
I should note at the outset that, according to the announcement, the focus is on high street shops and other companies facing aggressive rent collection from landlords. Unsurprisingly therefore, the timeframes correlate with the temporary protection in section 82 of the Coronavirus Act 2020 preventing landlords initiating, or continuing with, forfeiture proceedings for the non-payment of rent until 30 June 2020. Thus, whilst headline grabbing, it appears the proposed changes will not be a blanket ban on the issue of statutory demands and/or winding up petitions against all UK companies but looks limited to commercial tenants. It remains to be seen how these new measures will tie in with last month’s announcement that a temporary 3 month moratorium will be introduced, preventing creditors enforcing their debts against all UK companies; although, of course, there is a distinction between issuing a claim to recover a debt and enforcement.
The “notes to editors” section included at the end of the announcement states the proposed changes will necessitate the Court conducting an initial preliminary assessment on whether the winding up petition fits the legislative criteria or not i.e. if there is a causal link between the inability to pay debts and COVID-19 such that an order should not be made. It will be interesting to see whether this will necessarily increase the Court’s (and possible the parties’) workload and costs. It also remains to be seen how widely the Courts are willing to interpret the causal link between COVID-19 and the respondent’s financial position or failure to pay. Practically speaking, it will also be interesting to see whether the intention is to make this assessment on the papers or by submissions at a formal (Skype/Zoom) hearing.
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