The coronavirus pandemic has taken a strong hold on businesses of all sizes and turnover across the country, pushing many to the brink as social distancing measures have forced industries to either slow down, halt trading or adapt to the change in consumer behaviour. As a result of the financial pressures posed by the coronavirus pandemic and challenging trading conditions, the livelihood of employees and the long-term viability of businesses have been placed under threat.
As a response to the coronavirus pandemic, the UK government launched a series of support measures, such as the Coronavirus Job Retention Scheme, the Eat Out to Help Out Scheme and the Coronavirus Business Interruption Loan Scheme to help restart the UK economy. It's likely that without these measures in place, the damage absorbed by businesses may have been irreversible, leading many to consider restructuring or closure options.
Similarly, a major change to insolvency law was announced to increase business survival rates. A moratorium on wrongful trading was enforced to give businesses a better chance of survival and the opportunity to recover from the effects of the coronavirus pandemic.
What is wrongful trading?
Wrongful trading is when an insolvent business continues trading without seeking business recovery advice to protect creditor interests. Wrongful trading provisions, as part of the Insolvency Act 1986, forces businesses in grave financial difficulty to protect creditor interests by taking professional advice on insolvency procedures.
Continuing to trade with such knowledge is a serious red flag as, by snowballing the business into more debt, the chances of recovery are greatly minimized. If your business is unable to fulfil financial liabilities, you should cease trading before worsening the position of creditors and therefore falling foul of directorial responsibilities.
Due to Covid-19, wrongful trading rules have been temporarily suspended for businesses experiencing financial struggle as a direct result of the pandemic which is otherwise viable. This gives space and time to affected businesses to seek professional advice and facilitate recovery without looming creditor pressure and legal action. This move reflects the effect the coronavirus pandemic has had on the UK economy; disrupting supply chains and staggering cash flow as trading grinds to a slower pace than anticipated.
Wrongful trading vs insolvent trading
Wrongful trading refers to the continued trade of an insolvent business, however, insolvent trading is the act of continuing to trade without the knowledge that the business is insolvent. This is where a licensed insolvency practitioner can shed light on the path ahead because, if your business is insolvent, there may be a possibility to bring about a recovery, depending on the extremity of the debts and value of assets and liabilities. There is a slight distinction between wrongful trading and insolvent trading - wrongful trading could land the business in hot water, leading to director disqualification in extreme circumstances.
Wrongful trading rules during Covid-19
The Corporate Insolvency and Governance Act 2020 received Royal Assent and came into force in June, changing corporate restructuring rules to give distressed businesses the breathing space to seek a rescue during the coronavirus pandemic. The moratorium on wrongful trading rules means that businesses which are already insolvent can continue trading without the impending threat of court action or backlash from creditors. The moratorium protects businesses from being held liable for worsening the position of creditors, giving them the freedom to trade openly.
The temporary easing of insolvency rules provides relief to struggling businesses by protecting them from legal action against creditors until 30 September 2020, cushioning the growing threat of Covid-19 and the associated rough trading conditions. As a result of the unprecedented change, businesses in financial distress are protected from winding up petitions. However, this protection is only for businesses experiencing financial problems as a direct result of the Covid-19 pandemic.
The fate of distressed businesses post Covid-19
Once the moratorium on wrongful trading provisions comes to an end, businesses on the brink of financial failure will likely be forced to cease trading to protect creditor interests and seek company closure procedures, such as a creditors’ voluntary liquidation. If a creditor launches action against the business, it may be forced into compulsory liquidation to recoup outstanding funds during the liquidation process.
In addition to the end of the moratorium, funds available through government financial support schemes are tapering, eventually pulling Covid-19 emergency support as businesses restart, customers return to the high street and delayed supply chains resume. The coronavirus job retention scheme is due to provide support until the end of October, keeping employees in jobs, however, once the scheme ends, employers will be required to reconvene full payment of employee wages or consider the prospects of redundancy.
The Coronavirus Future Fund facility will close its doors in September, offering convertible loans between £125,000 to £5 million to innovative companies relying solely on equity investment.
Bouncing back from Covid-19 financial distress
If you continue to trade wrongfully after the moratorium is lifted, you will be committing a serious offence as this worsens the standing of creditors, therefore leading the way to an insolvency service investigation. If your business is experiencing financial difficulty and cash flow problems, life after the moratorium may force you to close your doors, leaving you exposed to creditor action. If your business is in financial difficulty, you may fall behind on fulfilling essential expenses, threatening the smooth running of your business and both short-term and long-term success.
There are several restructuring and recovery solutions which a licensed insolvency practitioner can administer to rescue your business, giving it a fighting chance to survive the Covid-19 pandemic. This includes the likes of entering a Company Voluntary Liquidation, Company Administration or negotiating a Time to Pay arrangement to space out your tax liabilities.
About the Author
Jon Munnery is a partner at UK Liquidators, the UK’s largest company liquidation service with over 70 offices across the UK, managed by restructuring and insolvency specialists. The partner-led team are highly experienced in providing liquidation services including a Members’ Voluntary Liquidation, Creditors’ Voluntary Liquidation and administration services.