Managing Risk - What Should I Do If My Business is at Risk of Insolvency?
22 April 2020
Companies in danger of running out of cash should start considering their options in terms of payments and debts. Many businesses have been hit by price hikes from suppliers, while others are operating at severely reduced capacity or are unable to operate at all – however, they may still have obligations to maintain staffing levels or meet rental agreements.
In the UK, the government has enforced temporary changes to insolvency rules intended to prevent firms filing for bankruptcy and help them recover after the pandemic. Under the new guidance, wrongful trading law is suspended, enabling organisations to keep paying their staff and suppliers, and even delay tax payments, despite the risk this could cause them to go into administration. This insolvency protection also applies to companies restructuring their operations in order to adapt to new materials sourcing, supply arrangements or product provision.
While the relaxing of wrongful trading law will support businesses in the short term, companies choosing to take this lifeline are advised to monitor and record all relevant financial decisions during this period, to prevent any issues in the future.
In Australia, company directors will not be liable for insolvent trading by paying costs in the normal course of business for the next six months. For the same period, the government also increased the debt threshold for taking statutory legal proceedings, from A$5,000 to A$20,000, and extended the period for a business to respond to a bankruptcy notice from 21 days to six months.
The US has eased its Chapter 11 bankruptcy rules under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which offers greater debt accumulation and timescale limits, and provides stimulus relief packages where applicable.
For Europe, many countries including Italy, Spain, France, Germany and Switzerland have suspended both voluntary and involuntary bankruptcy proceedings, with cases to be reviewed after the lockdown periods end. However, the limitations and exceptions to temporary insolvency rules are different in each country, so it is recommended to check the terms for your region.
Insolvency US (US Government)
Insolvency Australia (Australian Government)
Insolvency Asia (Mayer Brown)
Insolvency UK (UK Government)