The drafting of emergency legislation to soften insolvency rules during and after the COVID-19 lockdown has been cautiously welcomed by a top expert at Thursfields Solicitors.
Stephen Rome, a senior associate solicitor in the Dispute Resolution department at Thursfields, was commenting after various reports debating the pros and cons of the forthcoming changes.
Business secretary Ashok Sharma has already pledged a three-month suspension of wrongful trading laws that make directors personally liable for debts if their firms continue trading while insolvent.
And he has promised three months of breathing space to allow them to restructure without creditors being able to enforce repayment of their debts.
Stephen said such emergency legislation could help sustainable companies, but that the government needed to take care not to make it too easy for weaker businesses to exploit the loopholes.
He said: “We welcome the prospect of legislation that could bring comfort to good trading companies in difficult situations because they’ve been rushed off their feet by COVID-19.
“I’m talking about previously sound companies whose good cashflows and reserves have been put under pressure by being forced to stop or reduce trading during the pandemic.
“This is something that’s been particularly hard for firms in the construction, retail, accommodation and hospitality sectors where everyone had to go home on furlough, revenues stopped or declined, but expenses like rent and other ongoing bills have continued.
“Legislation that suspends any insolvency action against them while they recover is very welcome.
“However, it must also ensure that companies already in financial difficulty before COVID-19, perhaps even on the edge of potential wrongful trading, do not see this as an opportunity to abuse such moratoriums.”
Stephen said he expected a lag in potential insolvencies, as although companies had been forced to cease or reduce trading they were currently being helped by the government’s furlough scheme, and by other assistance such as VAT deferrals, grants and low-cost loans.
He said this had resulted in a noticeable reduction in winding up orders issued by the likes of HMRC.
But he warned: “There is currently a calm before a potential storm, as the real impact on insolvencies is likely to come once the government starts to remove support after October.
“That’s when there’s going to be an uptake in creditors wanting to recover their money, and a resulting challenge on company assets and, in many cases, new petitions for insolvencies.
“When those debts become due, that’s when companies who are struggling may find it even harder to survive.”
Stephen added: “When the crunch from creditors comes, you’d hope that good companies can look to some form of refinancing against assets currently not charged, and that’s where new leniency might be helpful.
“But if a business is mortgaged to the hilt anyway, there might be no room for manoeuvre, and that’s why legislation needs to be carefully drafted.”
Any business seeking advice on potential insolvency can contact Stephen Rome on 0121 726 8782 or by emailing email@example.com.