UK To Suspend Wrongful Trading Rules Amid Pandemic

By Richard Crump
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Law360, London (May 20, 2020, 6:54 PM BST) -- The United Kingdom introduced legislation on Wednesday to temporarily suspend wrongful trading provisions as part of new insolvency and corporate governance measures to protect businesses affected by COVID-19.

The Corporate Governance & Insolvency Bill will provide struggling companies with a short period of protection from creditors to give them a better chance of survival during the pandemic, the government said in an impact assessment of the new laws.

Under the bill, wrongful trading provisions will be suspended until at least June 30, removing the threat of personal liability to directors who continue to trade through the pandemic if their company subsequently enters insolvency.

It is an offense for a company director to continue to trade and incur liabilities when they knew or should have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration.

Liquidators and administrators will not be able to take an action against an insolvent company's directors for any losses to creditors resulting from continued trading while the wrongful trading rules are suspended.

In addition, the bill will create a 20-day company moratorium, which can be extended to 40 days, whereby creditors will be prevented from taking legal action against a company while it is considering options for rescue.

"Introducing a new form of moratorium as envisaged by these measures will help provide companies of all sizes in financial difficulty breathing space to consider their rescue options," the Department of Business, Energy and Industrial Strategy, which put forward the legislation, said in an impact assessment published alongside the bill.

The bill also introduces a new restructuring procedure that will allow a company to bind all creditors through a so-called cross-class cram down provision, whereby dissenting creditors will be forced to sign up to a restructuring plan if the court deems it to be "fair and equitable."

Termination clauses in supply contracts that allow suppliers to stop supplying a company that enters insolvency will also be temporarily suspended. The proposals include safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business.

The Financial Conduct Authority, the financial sector's watchdog, said on May 14 the measures will not be available for some financial services firms and contracts.

--Editing by Alyssa Miller.

For a reprint of this article, please contact reprints@law360.com.

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