Call to extend Covid-19 insolvency protection

The government should extend emergency Covid-19 insolvency measures or risk seeing a raft of company collapses and job losses later this year, the Institute of Directors (IoD) has warned

Under normal circumstances, directors have a strict duty to cease trading if their company is facing insolvency and may face financial or legal liabilities if they seek finance instead of doing so. In June, the government introduced emergency coronavirus legislation to suspend the threat of liability for such ‘wrongful trading’.

This protection runs out on 30 September, and the IoD said that failure to extend the measure could lead to ‘entirely preventable company collapses’.

The institute argued that the measures should be extended to the end of the year, to aid the economic recovery from the pandemic and to safeguard jobs.

Roger Barker, the IoD’s director of policy and corporate governance, said: ‘The recovery has begun, but businesses are not out of the woods yet. As we start to emerge from the pandemic, many normally successful small firms are in a perilous position, and we must give them a chance to get back on their feet.

‘The government has rightly supported business survival, and emergency legislation in June was an important step. The need for this support has only intensified as we enter the next stage of the recovery. Firms trying to adjust will face steep costs and limited revenues.

‘Without these measures, we could see some entirely preventable company collapses, putting our economic recovery and jobs at risk. Directors must be in a position to see their organisations through the crisis – they shouldn’t be penalised for acting responsibly amid unprecedented circumstances.’

The Corporate Insolvency and Governance Act 2020 became law on 25 June 2020. The emergency legislation introduced a time-limited suspension of liability for wrongful trading applying from 1 March to 30 September 2020.

Before the emergency measures were introduced, under the Insolvency Act 1986, the board of directors has a strict duty to announce a cessation of trading if the company is insolvent – or if insolvency cannot realistically be avoided in the near future.

In that situation, the 1986 Act requires a company to be placed into an insolvency procedure – such as administration or liquidation – in order to safeguard the interests of the company’s creditors. Under the 1986 Act, failure to do so carries the risk of personal liability.

The suspension of wrongful trading does not affect directors’ wider liabilities under company law, for instance around fraudulent trading.