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Wrongful trading and the restructuring moratorium

The Government’s announcement about the suspension of the wrongful trading regime and the proposed restructuring moratorium have been widely welcomed, not least because it demonstrates that the Government is applying thought to the insolvency law implications of its policy of actively encouraging companies to soldier on and to maintain employment. The details of the proposed legislation have yet to be seen, but in the meantime, here are a few thoughts.

  1. Whilst existing formal insolvency procedures include moratorium provisions, the concept of a moratorium purely for restructuring or breathing space is novel and will require thoughtful, effective and informed legislation if it is to be truly effective. The conflicts facing legislators are many and various, but are broadly set in the desire for speed and flexibility, which could leave the procedure open to abuse, as against greater formality which can lead to delay and a narrowing down of access to the procedure.

  2. It will be interesting to see how vital supplies can be assured during a moratorium. In particular, if a business cannot survive without access to, for example, raw materials for manufacturing, how can suppliers be made to supply when to do so without regular payment might not only breach their credit policies but threaten that supplier’s viability.

  3. It will also be interesting to see what can be done with a moratorium if the market conditions which existed at the time that it is entered into change. Companies are experiencing the most extraordinary movements in turnover and may also be affected by issues such as availability of labour due to illness, failure of suppliers or the cancellation of customer orders, all of which can only be dealt with on a short term basis. Planning a restructuring in such an uncertain world can only be educated guesswork at the best.

  4. The relaxation of the wrongful trading regime has been a useful move to help keep companies alive by removing a specific area of personal liability for directors. However, in circumstances where the Government is, as part of its strategy for business, encouraging borrowing by companies, other potential problems remain. The statutory duties which directors have under the Companies Act remain in force, and it is easy to see circumstances where the directors of a company which continues beyond the point at which wrongful trading would have kicked in might, judged with hindsight, have breached their Companies Act directors’ duties. This has a resonance not only in the Companies Act but in the misfeasance provisions of the Insolvency Act, so for the suspension of wrongful trading to be fully effective, this area ought also to be clarified.

More widely, reports this morning from business organisations speak of thousands of businesses who cannot access Government backed loans or who will not be able to do so in time. One issue would appear to be the complication produced by the availability of real property assets which are regarded as being available for secured lending but secured lending being impaired by time constraints and issues such as the difficulty in obtaining valuations. This, and some of the questions raised earlier in this note, lead in turn to the further question as to whether the Government will be able to maintain its strategy of assisting companies through enabling borrowing or whether, in order to keep businesses intact, the Government will be pushed down the road of offering further fiscal support.

If you wish to discuss any of the maters raised in this note, please contact Ian Waine at Prettys on 07979 498817 or iwaine@prettys.co.uk. Ian leads Prettys’ corporate services team and has extensive experience of advising insolvency practitioners and advising companies and their directors on insolvency and financial restructurings. 

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