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Unwinding Government Support – What Should Directors Do Now… – Insolvency/Bankruptcy

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Avid readers of this blog, insolvency aficionados, or anyone who
may have glimpsed the news over the past year will not have failed
to notice that substantial government support packages were put in
place to help businesses survive during the COVID pandemic. These
measures were particularly important during the various lockdown
stages when many businesses were prevented from trading either at
all or on any normal basis.

One such measure was to prevent landlords from exercising their
right to forfeit leases based on the non payment of rent. There
have been staggering and wide ranging estimates of how much rent
has accrued due and remains unpaid as a consequence –
anywhere between £5-7 billion. This moratorium on forfeiture
was due to come to an end on 30 June 2021 but the government has
recently announced a somewhat surprising nine month extension
thorough to end March 2022. Good news for some, less so for others,
depending upon which side of the fence you sit on. It has been made
clear that tenants who “can pay should pay” and that both
landlords and tenants are expected to work together and reach
agreement as to how to deal with the arrears. A new arbitration
process will be introduced for when the moratorium comes to an end
to deal with structuring repayment of any remaining arrears. Quite
how that will work and the basis upon which such adjudications will
be made, has yet to be seen.

Another part of the support packages was to suspend the
potential liability of directors for wrongful trading. This is due
to come to an end in June 2021 but interestingly has not (yet) been
extended. It may be that this has just fallen through the cracks
again – when the suspension initially came to an end in
September 2020 it was not reinstated until November and without
retrospective effect, leaving a two month gap for which directors
theoretically could be found liable. Or it may actually be a
positive decision not to extend – as the various support
measures start to unwind it makes sense for that to happen on a
staggered basis and for directors to have to confront their duties
and responsibilities with renewed focus.

But where does that leave the liability of directors and the
payment of rent? With no means to enforce non payment it is an
obvious debt for struggling businesses to choose not to pay. But of
course the liability itself continues to accrue. If the business
falls into a formal insolvency process then the directors will be
at risk of being found personally liable to pay compensation for
allowing this rent to accrue. The situation is made more
complicated by the current uncertainty as to exactly how
compensation for wrongful trading is calculated – whilst
there is a view that simply not paying one class of creditor does
not mean directors should be liable provided that the overall
deficit to creditors as a whole has not worsened, that is by no
means set in stone. And let us not forget about the director
disqualification process – recent caselaw suggests that
deliberately not paying one class of creditor to free up cash to
pay to those who are considered to be essential for trading, may be
grounds for disqualification. Is that a risk worth taking…?

The well advised director will need to get back to the basics of
wrongful trading and good corporate governance; taking advice;
documenting decisions; ensure there is a reasonable prospect of
avoiding insolvency; having proper engagement with landlords;
consider working up a repayment plan now rather than waiting until
March 2022; and generally having a contingency plan for the worst
case scenario.

Originally published 1 July 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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