Shortly after the first lockdown in March 2020, the government passed a variety of legislation intended to assist ailing companies with a view to preserving jobs and protecting the long-term future of those businesses.
What were these temporary measures?
The legislation included a temporary ban on issuing statutory demands and restrictions on winding up petitions unless it could be shown that the financial woes of the company were unrelated to (or predated) the Coronavirus pandemic. There was also a relaxation of wrongful trading provisions. The provisions have since been extended a number of times and at the time of writing are due to come to an end on 30th June 2021, although it is anticipated that the measures will be extended further.
The effect of these changes
The ban has resulted in a reduction of 34.62% of all corporate insolvencies for the year to March 2021, with the numbers of compulsory liquidations being down by a staggering 73.55% for the same period.
While at first glance this appears to be good news for businesses, employees and the wider economy, there are implications, which are perhaps not so welcome.
Fraudulent claims or not utilising funds for business purposes
I have heard numerous anecdotal tales of directors who have taken advantage of various Covid-19 Government financial support schemes. This includes Bounce Back Loans, the Coronavirus Business Interruption Loan Scheme and the Coronavirus Job Retention Scheme among others, where there have either been fraudulent claims or, rather than utilising those funds for business purposes, the directors have used them personally, for things such as foreign holidays and expensive cars. Of course, should the company go into liquidation at some point in the future, the liquidators will be obliged to consider as a part of their investigations, whether any fraud has taken place. If any potential criminal matters, statutory or regulatory breaches, which are not already being investigated by the regulators or the police are identified, the liquidators are required to report the wrongdoing to the appropriate authority. While it is right that any fraud is identified, unfortunately the more time that passes before these transactions are scrutinised, the more difficult it could be to ascertain what offences have taken place.
Another matter to consider is that there are time limits on most antecedent transactions entered into by a rogue (or unwary) director. This means that transactions that would normally be overturned by a liquidator, such as a transaction at undervalue or (under certain circumstances) repayment of a directors loan account, which could be void if they occur within 2 years of the commencement of liquidation, could well fall outside the time scale, due to the delay caused by the temporary provisions.
Delaying winding up can also be detrimental to employees who will only have their claims for redundancy, arrears of pay, holiday pay and payment in lieu of notice processed by the Redundancy Payments Service after a formal insolvency procedure has taken place.
From a creditor’s perspective, the delay in being able to petition to wind up a debtor company could have serious financial implications, including its own survival.
Also, due to the reintroduction of crown preference in December 2020, which provides for some crown debts to rank as a new second preferential creditor, the delays will mean the funds available for unsecured creditors may, in some cases, be considerably reduced due to the amount paid preferentially to HMRC.
How will this be viewed?
The relaxation of the wrongful trading provisions was intended to temporarily remove the threat of personal liability arising from wrongful trading for directors who continued to trade a company through the crisis, with the uncertainty that the company may not be able to avoid insolvency in the future. Wrongful trading is in general terms quite difficult to prove, so it will be interesting to see how this pans out when things return to ‘normal’.