Wrongful trading, Winding up & the latest on Corporate Insolvency

David McGinness


Wrongful trading, Winding up & the latest on Corporate Insolvency

With little fanfare on 25th November 2020, the UK Government introduced a second suspension of the wrongful trading provisions. Wrongful trading occurs when a director knew or ought to have known that there was no reasonable prospect of the company avoiding liquidation, yet didn’t take steps to minimise the potential loss to creditors. If wrongful trading is proven, it can result in directors being held personally liable for the incurred loss by the company.

The provisions had previously been suspended from 1 March to 30 September 2020 with the second suspension now running from 26th November 2020 to 30 April 2021. Interestingly, the second suspension isn’t retrospective, therefore wrongful trading can be considered between 1 October and 25th November.

In addition, on 9 December 2020 the Government announced it intends to reinstate the temporary suspension of the use of statutory demands and winding-up petitions until 31 March 2021. Basically, a winding up petition cannot proceed if it can be shown that the company has been impacted by the COVID-19 outbreak. When you consider that a winding up petition is a legal notice brought forward by a creditor, you can start to imagine how this restricts them from taking steps to wind up those companies which owe them money.

Both these suspensions should be welcome by company directors as it gives hard-pressed directors some respite and hopefully, gives them time to turn their finances around for what will surely be a difficult 2021.

However, will it allow sufficient time to allow companies to recover from this pandemic? On 31 March 2021, the furlough scheme is due to end [now extended to end April 2021], along with the moratorium on winding up petitions and the 100% non domestic rates relief expiring – and combined together this is quite some tidal wave on the horizon!

For example, if we take a look at the hospitality sector which arguably has been the hardest hit sector in the UK.

UK Hospitality estimates that there are around £1.6 billion in unsettled rent within the hospitality industry, even before December’s rent quarter falls due. Without the Christmas trading period – The British Beer & Pub Association, the leading trade association representing brewers and pubs, expects beer sales in pubs to be as much as 90% lower than normal this December a lean Spring is unlikely to result in companies in this sector being in a position to claw back to profitability and start the gruelling process of repayment.

Therefore whilst the continued suspension of these measures is surely welcome, the question remains whether the three month moratorium will be sufficient time to allow suppression of the virus, normality to return and – crucially – profitability to increase to help improve debt laden Balance Sheets.

 

Further information, or need to talk?

As we so often say in the world of insolvency, the sooner you seek assistance the more options you have. So if you do foresee an issue for your business, please do get in touch and I or one of my colleagues would be happy to chat. The team can be found on this webpage, or you can email us at covid19@frenchduncan.co.uk or call 0141 221 2984.

 

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