Insolvency measures to be extended

Insolvency measures to be extended

Many business owners are breathing a sigh of relief after the recent government announcement (24 September 2020) that measures put in place to protect businesses from insolvency will be extended to continue giving them much-needed breathing space during the ongoing Covid-19 pandemic and economic downturn.

The many changes introduced by the new Corporate Insolvency and Governance Act 2020, designed to protect businesses from insolvency, were due to expire on 30 September. These temporary measures include:

  1. The use of Statutory demands and winding-up petitions will continue to be restricted until the end of the year to protect companies from aggressive creditor enforcement action due to coronavirus related debts.
  2. Termination clauses are still prohibited, stopping suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process. However, small suppliers will remain exempted from the obligation to supply until the end of March 2021 so that they can protect their business if necessary.
  3. Modifications to the new moratorium procedure, which relax the entry requirements to it, will also be extended until the end of March next year. A company may enter into a moratorium if they have been subject to an insolvency procedure in the previous 12 months.
  4. Measures will also ease access for companies subject to a winding-up petition. The temporary moratorium rules will also be extended for the same period.
  5. Companies and other qualifying bodies, with obligations to hold AGMs, will continue to have the flexibility to hold these meetings virtually until the end of 2020. This means that shareholders can continue to examine company papers and vote on important issues remotely.

Commenting, Business Minister Lord Callanan said: “It is vital that we continue to deliver certainty to businesses through this challenging time, which is why we are now extending these important and necessary measures to protect companies from insolvency. Through this measure, we want to ensure businesses are able to not only come through this testing period, but also to plan, adapt and build back better.”

So, what does this all mean in brief?

  • Statutory demands made between 1 March and 31 December 2020 are void.
  • Winding-up petitions presented from 27 April to 31 December 2020 are suspended where a company’s inability to pay is the result of the Covid-19 pandemic.
  • Restrictions on the court’s jurisdiction to make a winding-up order will apply until the end of 2020.
  • Small business suppliers are exempt from the prohibition on enforcement of ipso facto clauses until the end of March 2021.
  • Landlords are prevented from using commercial rent arrears recovery (CRAR) before the end of this year.
  • Commercial leases cannot be forfeited for non-payment of rent or other sums due between 26 March and the end of December 2020.

 

Martin Kingman, CEO of Professional Legal Collections Ltd, observes that this will be a double-edged sword: “It will give some businesses certainty and protection but it could also damage others whose debtors are not paying up and using the protection not to keep their business afloat but as a mechanism to avoid and delay payment as long as possible. Despite these restrictions, we urge any struggling businesses to contact us for specialist advice and protection in these uncertain times.”

Information correct as of 25 September 2020

I’m a director of a limited company – can I be pursued personally if it all goes wrong?

I’m a director of a limited company – can I be pursued personally if it all goes wrong?

 

On Saturday 28 March 2020, the Government announced that they would be modifying the Insolvency Act 1986 to allow businesses breathing space and allow them to continue to trade whilst options for recovery are explored. This is by looking to suspend a director’s personal liability for wrongful trading under that Act, amongst other steps. The detail is not yet known as the legislation has not yet been drafted and passed through Parliament, we understand it will be drafted and passed at the earliest opportunity.

 

Let’s explore the law as it stands at the moment, we can provide further Covid-19 specific advice as and when the details are released by HM Government.

 

Firstly, if you are a director of an incorporated company Ltd, PLC or LLP (that is a Private or Public Limited Company or Limited Liability Partnership) then you may think you are personally protected – that’s why you were advised to form the company in the first place, right?

 

Yes, well your personal liability usually is limited to the paid-up share capital that you may have put in as a shareholder. Directors are not usually personally liable for the acts and omission of the company which is a legal entity in its’ own right.

 

But, (yes there is a but), in certain circumstances you can be held PERSONALLY liable for the debts of a limited company or partnership. There are a range of circumstances where you will be held liable:

 

  1. You’ve signed a personal guarantee;
  2. You’ve pledged a person asset as security for a company debt;
  3. You’ve overpaid yourself from the company money and created an overdrawn Director’s Loan Account (DLA);
  4. You’ve paid yourself an illegal dividend from the company as a shareholder, when the company has not made a profit;
  5. You’ve permitted the company to dispose on an asset below its true market value;
  6. You’ve permitted the company to pay a creditor of the business in preference to another and the business is insolvent;
  7. You’ve permitted the company to continue to trade beyond the point that it ought to have known that it was insolvent and past the point of no return;
  8. You’ve misrepresented the facts or fraudulently applied for credit or taken deposits on behalf of the business knowing you would not be able to deliver;
  9. You’ve not acted in the best interests of the business and someone has suffered a loss as a result.

 

These are dealt with under either the Companies Act 2006 or the Insolvency Act 1986. If you have signed a personal guarantee or pledged a personal asset as security for a company debt or liability then generally you are bound by this and you will be obliged to honour the debt. We urge you to take professional advice before entering into such an agreement and also if you believe you have and you need to explore whether it is valid. There are some legal hurdles which have to be completed so we suggest you contact us to take professional advice on your particular issues today.

 

Where you have overpaid yourself as the company cannot afford to pay you or where you have paid yourself as shareholder and the company has not made a profit is an area we frequently see company directors falling foul of the law. This is dealt with under Part 23 (sections 829-830) Companies Act 2006.

 

Where you’ve permitted the company to dispose on an asset below its true market value, this is technically known as a transaction at an undervalue, covered under s238 Insolvency Act. Where the company undertakes a transfer of an asset as a gift or at significantly less than the true value of the item in the time up to 2 years before the company entered into insolvency. The transaction can be reversed by the court and you can be liable for the costs of the court proceedings.

Where you’ve paid one creditor of the company and not paid another this is called a preference payment as where there is an insolvent situation (or you ought to have known there was one) then you can attract personal liability if the transaction occurred within 6 months of the company becoming insolvent, there the party to whom the payment is made is a connected party then the time limit extends to 2 years. When money is tight, and an insolvent situation may occur you should seek professional advice and only pay all creditors on a pari-passu basis. That is in equal amounts as a percentage of the total debt.

 

Fraudulent or Wrongful trading are covered under sections 213 and 214 Insolvency Act respectively.  The wrongful trading section is likely to be suspended following the Government announcement. Fraudulent trading will more than likely not be as this involves the element of intent. Any person found guilty are liable to make contributions to the companies’ assets as the court thinks proper. This could have a serious and far reaching impact on you as a director, s993 of the Companies Act 2006 was extended by the Fraud Act 2006 to increase the penalty to up to 10 year’s imprisonment.

 

Where you knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation and you as a director continued to allow the business to trade beyond that point then you can be personally liable for the losses from that point in time. You need to take expert legal advice from us on your position immediately if this is the case.

 

The final time is known as misfeasance, under s212 Insolvency Act 1986. This is a wide provision and can snare many unsuspecting directors who do not take advice when the business performance downturns and cashflow become tight. The section covers where a director (or former director) has misapplied or retained or become accountable for any money or property of the company.

 

In summary, the points above can be daunting and scary to the average director who is just trying to earn a living. We strongly recommend that you take expert advice to understand your liability and any downsides to any action you chose to take, it can save you a lot of money, heartache and stress in the future. As we move in very uncertain times, we urge you to make contact with us to ensure you are protected, and your personal position is not put in jeopardy.

 

The above is intended as a guide to our interpretation of the law and the Government announcements, it is not intended and should not be used in lieu of specific legal advice which we recommend you take before taking any further action.

 

FlyBMI enters Administration

Over the past weekend British Midland Regional Limited trading as flybmi entered into administration leaving passengers stranded. It also leaves their 376 employees in jeopardy.

The Brexit uncertainty combined with the rise in fuel and carbon costs have been blamed by the airline who carried 522,000 passengers in 2018 on 29,000 flights.

This is another sad demise which follows the 2017 administration of Monarch.

Small Business Cashflow warning

With the forthcoming suspected interest rate rise, 40% of SME’s admit to having no financial buffer despite having outgoings of over £4k per month.

SME loan approvals has falled from 58% to 43% in the past year. Where SME’s do have something in reserve, the most popular are:-

  • 59% Cash Savings;
  • 34% Property;
  • 23% Overdraft;
  • 20% Plant and Machinery; and
  • 17% Business Credit Card.

More worrying was the fact that 55% of SME’s admit to paying bills late to ease cash flow issues. 21% admit to doing this monthly.

If you have suppliers who are not paying you then you need to get in touch; we can help you recover what you are due.