In light of the financially fragile state some businesses are finding themselves in as result of COVID-19, we discuss in this briefing note when – if ever – payments or other benefits can be given to some creditors but not others, and when such a transaction might fall foul of the unlawful preference provisions of UK insolvency legislation.

Having ensured, to the extent possible, the safety of their workplace and workforce, many companies are turning their mind to the economic impact of the COVID-19 pandemic. All businesses are impacted, and in many cases, the impact will be adverse, whether caused by travel restrictions, office or workforce disruptions or decreased demand.

In such turbulent times, financial institutions and their customers or borrowers may be facing significant challenges and stresses. There are signs suggesting that clients are facing financial distress and would benefit from assessing restructuring options, or that it would be time to consult with your intervention or special loans group.

As businesses and companies in the UK face an uncertain few weeks and months with unprecedented pressures, it can be easy for directors to panic and not know where to turn.

To assist in decision-making, we give a reminder of the law in this area, and some signposts for those seeking help.

In this briefing, we give a short reminder of statutory duties owed by UK directors under the Companies Act 2006, the potential risks of continuing to trade while possibly insolvent, and actions that should be taken in order to mitigate those risks.

Directors’ duties

Hot on the heels of our April 2020 article on the proposed reintroduction of the Crown preference, Parliament has recently approved legislation that will increase the ring-fenced amount available to unsecured creditors on an insolvency of a company from £600,000 to £800,000.

In our last article, which can be found here, we reported on the government’s intention to give HMRC priority in the recovery of certain debts (including VAT, PAYE, Employee NICs, and Construction Industry Scheme deductions ) in insolvency proceedings.

In the recent case of Signature Living Hotel Limited v Andrei Sulyok Roxana Monica Cocarla [2020] EWHC 257 (Ch), 2020 WL 00929732 the High Court considered whether two deeds of guarantee which failed as deeds (because the formalities for a deed had not been complied with) remained enforceable as a matter of contract.

In June 2019 the Government announced a plan to introduce a new “breathing space” scheme to protect individuals and families struggling with problem debt and to give those individuals and families extra help and time to get their finances under control.

On January 23, 2020, the Supreme Court of Canada unanimously allowed the appeal from the Québec Court of Appeal’s decision in 9354-9186 Québec Inc. et al. v. Callidus Capital Corporation, et al., opening the doors to third-party litigation funding in insolvency proceedings in Canada.

Background

In the landmark decision in Re Systems Building Services Group Limited [2020] EWHC 54 (Ch), ICC Judge Barber held that the duties of a director survive the insolvency of a company.