New insolvency measures to support businesses affected by COVID 19

Further to our previous emails, the Government has now announced new insolvency measures to support businesses that would otherwise be viable but for the current crisis.

The Government is looking to amend insolvency law to bring in a number of changes to support businesses as well as their suppliers and creditors.

The most notable of these changes is a temporary suspension of wrongful trading provisions. Previously, directors who traded their company for too long when there was no reasonable prospect of it continuing to be a going concern were committing an offence which could have led to the company debts being imposed on the director personally.

The suspension of this law is designed to allow directors to continue to trade during the current crisis whilst removing the threat of personal liability should the business ultimately end up going into insolvency.

With many businesses throughout the country now facing completely unprecedented financial issues, this will no doubt be welcome news to directors who are striving to continue to trade.

We would however ask all directors to proceed with caution as they are still required to fulfil their duties properly and we would suggest that professional advice should be sought as required.

With this in mind, there are also potential issues for directors who remunerate themselves using dividends and will continue to do so during the current pandemic. Dividends are an appropriation of profit and as such a director should consider the solvency of the company and if its profitability will provide sufficient after tax reserves to support the amount of dividend being taken. Indeed, if the business was to fall into difficulty Insolvency Practitioners will scrutinise all withdrawals from the company bank accounts. Directors must be able to demonstrate that they had taken reasonable care in preparing the accounts that the dividends were based on even if ultimately it is proven that the profits were insufficient. It may be that directors may wish to now move to a PAYE remuneration strategy rather than continuing with dividends.

Should you require further clarification on the above, or any other matter, please contact your Fairhurst partner.