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Insolvency & Covid 19

02.07.2020 | News

The extent of protection given by the Act during the coronavirus pandemic to trading and business entities, directors and individuals in a trade or business is huge. Additionally, it comes with economic and financial consequences that will likely be inevitable and adverse immediately on the protections coming to an end.

The safest course for anyone providing credit at this time is to protect themselves as much as possible against incurring bigger losses and, insofar as secured credit is involved, for exposure to be closely monitored. These wider protections need understanding from and to be dealt with carefully by current and future creditors during the period that the Act has effect, especially as the consequences will likely transcend that period.

If anyone intends to increase another’s’ credit during the time that the Act is in effect, the creditor should ensure certainty over the solvency of the debtor. It should undertake the inquiries and investigations that would otherwise be the obligation and responsibility of those managing the companies and entities or, in the case of individual traders, the individual seeking that credit, whether or not the credit is secured or unsecured.

The Act protects against much personal and criminal liability of directors and individuals in trade or business for a period of time (currently until the 31st December 2020) and based, in general, on the effects of the Coronavirus crisis.

One main example being the protection against personal liability of directors and the bankruptcy of individual traders/businessmen in the event of them fraudulently trading.
Oddly, the Act goes further by providing protection against criminal offences under the Insolvency Act 2011. Such protection will likely have an impact on the ability to prove wider possible contraventions of the criminal statutory law by complicating issues of mens rea (state of mind).

The Act throws a major protective blanket over the liability of directors and individuals in trade or business and substantially cuts the ability of creditors and shareholders to intervene to protect themselves against insolvency or wrongdoing by directors (of companies and entities of various descriptions) or individuals in trade or business during a longer period of time and (in some cases) on certain conditions and/or grounds.

In general terms, the protections (currently lasting to the 31st December 2020) and which, in a few cases, needing careful consideration to understand which these are, are conditional on specified relevant coronavirus related circumstances existing, are the following:

  • restrictions on enforcement of floating and fixed security;
  • the suspension of statutory demands; 
  • the suspension of applications for administration;
  • the suspension of applications for winding-up and appointment of a liquidator;
  • wide presumptions against unfair preferences;
  • the presumption that the creation of a floating charge in favour of a connected person is an insolvency transaction is disapplied;
  • no summary remedy against past or current delinquent officers can be ordered;
  • no order for fraudulent trading can be made;
  • no order for insolvent trading can be made;
  • security cannot be enforced;
  • rights of forfeiture or peaceable re-entry of a company’s premises cannot be exercised;
  • there can be no repossession of assets of a company on HP, conditional sale or leasing or retention of title agreements;
  • restrictions on bankruptcy orders and offences; and
  • common law on both civil and criminal liability of the same or similar effect to any of the above does not apply.

The protections afforded to companies (and other defined entities) and individuals in trade or business by the Act are much wider (both in terms of civil liability and criminality) than the narrow protections intended to be afforded in England (the law has not yet been enacted there), which will be for a very short period of time and will be limited to wrongful trading, suspension of statutory demands and of winding up petitions (there will be no protections afforded in England given to individuals in trade or business and against criminality generally). Accordingly, no one should guide themselves by any advice given based on the proposed English law.

A huge question is what happens after the end of the moratorium? Will many be faced with a cliff edge? Will there be a huge rush to wind-up companies or for bankruptcy? Certainly, at this point, directors will need to carefully consider their position, irrespective of the provisions of the Act, to avoid personal liability as from that moment and going into the future.

If there is such a rush, creditors, both secured (more so) and unsecured, will have been adversely affected whilst directors and individuals, who have acted within the protections will likely walk away without the consequences, in both civil and criminal law, that they would have faced had the temporary protections under the Act not been afforded to them.

Both these possible consequences will need to be assessed at the relevant time as they will be subject to the manner in which the protections are lifted, but it is difficult to see how they can be avoided.


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