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Armageddon or Armistice?

8th July 2021

Armageddon or Armistice?

David Ellis, Partner and Head of Insolvency and Business Recovery at Higgs LLP, sends a warning to directors as wrongful trading rules come back into force following a Covid-19 hiatus

Directors of limited companies in the UK may be forgiven for starting to sleep a little better at night over recent months.  Irrespective of whether or not the remaining restrictions are lifted on July 19, predictions of a strong bounce back in the economy have been made by the Bank of England and even the IMF is expecting growth in the UK economy to be better than that of any of the other G7 economies over the next year.  

The increased spending power of British consumers is leading to excess demand across a large number of sectors in the economy and the uptake of vaccines has led to many businesses returning to full time operation. 

Companies which have struggled through the last 15 months, with the help of furlough payments, Government-backed loans and other temporary measures to help them to survive, may be starting to consider their plans for growth and expansion rather than concentrating on day-to-day survival.

Directors should, however, be aware of the key date on their road to recoveryOn July 1, there were due to be two major concerns for businesses arising from the ending of the temporary measures.  The first affects the viability of the businesses themselves.  The second affects directors personally.

The measure that affects the viability of the business itself arises from the fact that creditors will once again have unlimited rights to present statutory demands against companies that owe them money and can put them into liquidation if they are not paid.  Landlords also were due to be released from the restrictions that prevent forfeiture for non-payment of rent. An announcement has been made that the restrictions on landlords' rights will continue until March 2022 but the return of the statutory demand still seems likely. 

What should be of more concern to the director, however, is the return of the wrongful trading rules.  These were suspended last year and are due to return on July 1.  The wrongful trading provisions expose directors to personal liability if they should have realised that insolvent liquidation was inevitable but failed to take actions to protect their creditors.  The Government rightly suspended this during the initial stages of the pandemic when it was impossible in most industries to make any meaningful predictions regarding solvency for business.  Once the provisions return on July 1, however, directors must give careful thought to whether their companies have a viable future.  Many will be faced by arrears of tax and rent that has accrued over the last year as well as debt taken out in the form of business recovery loans so their solvency position will be considerably worse than it was at the start of 2020.

To the extent which their trading beyond July 1 increases the shortfall to creditors on the eventual failure of the company, the directors will face personal liability for such increase.

It is important that directors carry out a detailed review on the extent to which they can carry on in business.  Even if their creditors do not force their hands, many directors will be concluding that long term viability of the company cannot be guaranteed.  Insolvency practitioners are predicting a significant increase in voluntary liquidations from the businesses of those directors who are properly advised.  Directors who fail to carry out this assessment, however, may still find that the business fails subsequently.  If it does, then they will be forced to justify their decision to carry on trading after July 1 and should be aware that they may be facing personal liability for any increase in sums owing to the creditors arising from that date.

It remains possible that, in addition to extending the help for commercial tenants, the Government will further extend some of the temporary legislation to postpone the day of reckoning until later in the year and to extend the current armistice.  Essentially the aim is to reduce financial assistance while hoping to keep afloat as many businesses as possible. It is a fine line to tread between too little and too much support. If they get it wrong, however, then July 1 2021 will be a key date that will resonate for years to come for limited company directors.

 

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