An insolvency lawyer has warned that the relaxation of wrongful trading laws during the coronavirus outbreak will do nothing to prevent bad directors from taking advantage of creditors.
Business secretary Alok Sharma announced over the weekend that the government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue. Wrongful trading laws prevent trading while a business is insolvent.
Sharma said the measures would come in for three months, effective from March 1, for company directors so they can keep their businesses going without the threat of personal liability.
However, Frances Coulson, senior partner at Moon Beever, has warned that sanctioning the ability to preferentially pay suppliers has been overlooked in the move.
“Bad directors often make preferential payments to keep certain suppliers sweet, so they transfer over to a newco, dumping other creditors, particularly involuntary creditors such as utilities and local councils as well as HMRC,” she said.
“Suspension of wrongful trading offences for three months from March 1 won’t rescue long term abusers of credit, but will help cover the instant crisis,” Coulson added. “The changes also look as if they will allow preferential payments to suppliers, in order to enable continuation of trading. This needs to be carefully framed, as such preferences are often made solely to shift the business away from creditors rather than to keep the existing company going. Directors need a moratorium now for good reason but must not forget their statutory duties.”
Sharma said: “The government is doing everything in its power to save lives and protect livelihoods during these unprecedented times.
“Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.”