IoD calls for emergency insolvency measures to avert company collapses

Institute of Directors.

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.