The IoD is calling for emergency insolvency measures to prevent
widespread company collapses.
Under current laws, the board of directors has a strict duty to
cease trading if the company is facing insolvency, and may face
personal financial or legal liabilities at a later date if they
seek finance instead of doing so.
The IoD therefore calls on the Government to relax existing
insolvency obligations - including a moratorium on the current
offence of wrongful trading.
Jonathan Geldart, Director General of the Institute of Directors,
said:
“During the current crisis, directors are facing unprecedented
challenges and need to see urgent temporary measures to avert
entirely preventable corporate collapses.
“We’re calling on Government to prioritise jobs and the business
survival by relaxing existing insolvency obligations put on
directors and thereby providing business leaders greater room for
manoeuvre at this critical juncture.
“We should not allow a single viable businesses to go to the wall
because of this crisis.”
Further detail
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.
The company must then be placed into an insolvency procedure –
such as administration or liquidation – in order to safeguard the
interests of the company’s creditors.
In the current crisis, many directors are likely to be faced with
this impending decision – as companies struggle to find the
necessary cash with which to meet their financial obligations.
Furthermore, company directors may hesitate to seek or accept new
loans or support from Government if they believe that, by failing
to declare insolvency now, they may face personal financial and
legal liabilities at a later date.
The IoD therefore calls on the Government to relax existing
insolvency obligations - including a moratorium on the current
offence of wrongful trading - on a temporary basis in order
prevent a large numbers of company collapses. The IoD is also
calling for a temporary suspension of the ability of creditors to
present winding-up petitions.
In these extraordinary circumstances, boards should be allowed to
continue to run their companies even if technically insolvent as
a means of maintaining employment levels and preventing a major
economic downturn.
In addition, they should not hesitate to seek government support
if their business was a viable concern before the onset of the
crisis. In this environment, maximising the ability of creditors
to recover funds from a struggling entity after a lengthy legal
process is not the economic priority.
Of much greater importance is the need for companies right now to
maintain their service levels to the general public and support
the economic position of their employees.
Furthermore, it would be entirely inappropriate to allow
previously viable companies to go under when the proximate cause
of their financial distress are the measures demanded by
Government – even if they are imposed for the best of reasons.
Government must therefore support companies in navigating the
current crisis by removing the strict obligation of directors to
cease trading at the first sign of financial distress due to the
crisis. For the time being at least, companies should be
encouraged to maintain their operations and be given every
opportunity to improve their finances – including by gaining
access to the unprecedented financial support coming on-stream
from government.
