On 17 December 2020, the House of Lords is due to debate the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020. These measures would suspend existing wrongful trading provisions for a time-limited period to allow businesses to continue trading without the threat of company directors and other individuals being held personally liable should they go into insolvency. Similar provisions were introduced for a time-limited period earlier in the year.

The regulations came into force on 26 November 2020 under the made affirmative procedure. They must be endorsed by both Houses to continue to apply.

What do the regulations do?

These measures suspend the wrongful trading provisions in the Insolvency Act 1986. Such trading occurs when a company trades “beyond the point at which insolvency proceedings were inevitable”, leaving those responsible liable to legal action if there is evidence that creditors have incurred losses as a result. The Government argues that such personal liability creates a strong deterrent to the continued trading of an insolvent company and is an important protection for creditors.

However, due to the coronavirus pandemic a number of businesses that would otherwise be viable have found themselves in financial difficulty. As a result, these regulations amend existing wrongful trading provisions to provide that company directors and other responsible office-holders are “not responsible for any worsening of the company’s financial position that occurs during the period 26 November 2020 to 30 April 2021”. Companies will therefore be able to continue to trade without these individuals being personally liable were those firms subsequently to enter insolvency.

In so doing, these regulations revive similar provisions which were contained in the Corporate Insolvency and Governance Act 2020, but which elapsed on 30 September 2020. As above, the ‘relevant period’ defined in the regulations will apply until 30 April 2021.

This instrument also extends the period during which temporary relaxations apply to the way in which company AGMs and other meetings must be held. This measure was also introduced in the Corporate Insolvency and Governance Act 2020 to help companies during the coronavirus pandemic. This extension will apply until 31 March 2020.

Why does the Government believe the changes are necessary?

The Government argues that these measures are required due to the economic uncertainty caused by the coronavirus pandemic, citing the difficulty in trading conditions and recent lockdowns and trading restrictions which have been imposed on companies in an attempt to contain the spread of the virus. The Government notes that it was for similar reasons that insolvency provisions were modified earlier this year and argues such changes are needed again for a time-limited period. The Government acknowledges that creditors will lose a protection as a result but argues that personal liability provisions are only one safeguard which exists when companies are in a financially distressed position. As such, ministers contend that the measures are proportionate and will benefit the UK economy in assisting companies to survive the economic effects of coronavirus and continue trading, saving livelihoods and jobs.

The Government also contends that such provisions are urgent, explaining why they have been introduced through the made affirmative procedure and have come into force before being approved by both Houses of Parliament. Company directors will be making decisions on their company’s viability and future on a daily basis and the Government contends that they may take action to terminate a company which would in fact have been viable if not for the pandemic.

Parliamentary scrutiny

The Government’s explanatory memorandum to the regulations flagged up a number of issues for consideration by the Joint Committee on Statutory Instruments. Noting that this is first time the powers provided by section 20(1)(c) of the Corporate Insolvency and Governance Act have been exercised and subject to the ‘made affirmative’ procedure, the Government notes that there are a number of conditions which must be satisfied before those powers may be exercised. They include that ministers are satisfied the need for regulations is urgent, the regulations are proportionate, and that the same result cannot be achieved either without legislation or by using a different power. The measures introduced must also be time limited to six months unless subsequently extended.

The Joint Committee on Statutory Instruments has yet to report at the time of writing (a fact that was noted by the Minister during the debate in the House of Commons cited below). The House of Lords Secondary Legislation Scrutiny Committee examined the regulations as part of its 37th report, published on 9 December 2020. The committee offered no substantive comment other than detailing the purpose of the regulations.

Debate in the House of Commons

The House of Commons Delegated Legislation Committee debated the regulations on 14 December 2020. Opening the debate, the Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy, Paul Scully, noted that the regulations were being considered before the Joint Committee had reported:

We take the Joint Committee on Statutory Instruments very seriously as an important part of the scrutiny process, but at this stage we need to press ahead with important debates to ensure that the regulations’ passage is not delayed, as the committee has not been able to report back so far.

Speaking to the substance of the regulations, he noted that, while the development of a vaccine gave reason for cautious optimism, “we must in the meantime recognise the impact on business of the necessary but unfortunate restrictions on our daily life that are still in place”. With regard to the wrongful trading provisions, Mr Scully noted that similar provisions were implemented earlier in the year and said that once again directors face uncertainty about future trading conditions and thus “once again, they need the reassurance that they can continue to trade and save companies that would be profitable but for the restrictions without the fear of personal liability”.

He added that the 30 April expiry date will be kept under review, and should it become clear that the suspension was no longer needed to prevent companies from entering insolvency proceedings unnecessarily it would be removed, even if that is before the end of April 2021. Further, he contended it was important to remember the measures do not remove the other existing protections for creditors when a company is in an insolvent position. Indeed, he argued those directors who act irresponsibly can still find themselves subject to repercussions such as fraudulent trading actions or disqualification from acting as a company director.

On the provision made in the regulations for company AGMs and similar meetings, Mr Scully said:

Despite the fact that in large part the season for AGMs is behind us, we know that there remain about 80 large companies still to hold them between now and the end of March. That excludes the multitude of smaller companies, charitable incorporated organisations and mutual societies that have simply similar obligations. The extension in the regulations will give them comfort that they can continue to convene these and other general meetings safely and in a way that is consistent with their legal obligations.

Responding for the Labour Party, shadow minister Lucy Powell said that her party had been calling for such measures and thus welcomed the suspension of wrongful trading provisions and the extension of measures regarding AGMs. She reminded the House that Labour had proposed such an extension during the passage of the original legislation earlier in the year.

Lucy Powell also highlighted the difficulties being faced by companies as a result of the pandemic, and that the regulations would only provide some temporary protection:

Although today’s measures will provide some temporary relief for businesses worried about insolvencies, there is still a great deal of concern about the many cliff edges that businesses face all coming to a head at the end of March—the VAT referral, the business rate holiday, the measures in these regulations, measures on loan repayments and the furlough scheme will all come to an end. Can the Minister tell us what he is doing to ensure that we will not see wave after wave of insolvency as these cliff edges all come at once?

She added that the best way for the economy to recover was to save businesses and jobs “today” rather than return to a series of cliff edges, and “have a proper plan in place for businesses to recover”.

In response, the Minister said the Government agreed on the need for certainty for business and, as Lucy Powell had rightly said, on the need to save businesses and jobs today while also having a medium and long-term plan. He said that ministers including himself were in regular dialogue with those industries affected by the pandemic, and such discussions included rates, VAT and the moratorium on statutory demands and winding-up petitions. With regard to timing and why the suspension implemented earlier in the year was not left in place, he said:

On the question of why we are doing this now and why we will come back to the measures, the wrongful trading measures are clearly a deterrent but they are also an important protection for creditors. It seems right that when things were looking up, we allowed creditors that extra protection by bringing the wrongful trading provisions back into operation.

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Cover image by Christopher Bill on Unsplash.