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The UK and Scottish Governments have taken a number of measures to help companies weather the Coronavirus crisis. These include the Business Interruption Loan Scheme (Scheme) which has been introduced by the UK Government to provide SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5 million.  This support has been welcomed by businesses coming to terms with the economic consequences of the current crisis but taking advantage of these sources of funding is not always straightforward; borrowing needs to be repaid and directors are subject to director duties and rules on wrongful trading which can result in directors incurring personal liability.

The announcement by the UK Government on Saturday that it will temporarily relax these rules will be a relief to many directors looking to take advantage of loans under the Scheme and/or restructure their business.   Prior to this newly announced suspension of the rules on wrongful trading, there was a real concern that directors would be forced to look at prematurely placing their companies into formal insolvency proceedings to avoid the risk of creditors pursuing them personally.

The BIL Scheme

The Scheme will potentially provide the main source of funding for SMEs. It is operated by the British Business Bank through its accredited lenders which includes high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders. It provides the lender with a government-backed, partial (80%) guarantee against the outstanding balance of the finance, however the borrower remains 100% liable for the debt. Interest payments and any lender-levied charges in the first 12 months are covered by the UK Government. The finance terms for term loans and asset finance facilities can be for up to six years, and for overdrafts and invoice finance facilities for up to three years. 

More information on the Scheme can found here 

Director Duties/Wrongful Trading

Directors owe statutory duties to shareholders, creditors and other stakeholders. They are also subject to rules on wrongful trading which can result in personal liability if their business continues to incur liabilities when there is no realistic hope of avoiding insolvency. In normal times directors need to consider carefully taking on debt unless they are confident of the company’s ability to repay it. The UK Government has acknowledged these rules may force directors not to take on more debt and to put companies into administration or liquidation.  

The UK Business Secretary, Alok Sharma, announced yesterday that it will relax insolvency to allow companies to undergo a rescue or restructure process to continue trading, giving them breathing space that could help them  avoid insolvency.  The detail of this is yet to be published but the changes will include a temporary three month suspension of the wrongful trading rules backdated to the start of March. Of course, in order to access loans under the Scheme, companies will need to demonstrate to lenders that they should be able to come out of the other side of the crisis with a viable business but given the uncertainty over what the future holds, the relaxation of these rules is very welcome.     

There is a flipside to the relaxation of these rules. The rules are designed to provide protection for creditors dealing with companies and suppliers will not be able to rely on these rules for at least the next two  months. There is though no suggestion that many of the other rules regarding fraudulent trading and director disqualification will also be suspended or relaxed so although directors will have the comfort of knowing the normal rules on wrongful trading have been temporarily suspended, there will still be other deterrents in place to protect creditors against director misconduct. Once the detail on the relaxations to the normal insolvency rules has been published, it may be that further safeguards are introduced for creditors.   In the meantime, suppliers will need to exercise diligence over who they deal with now more than ever.

It is still important that directors properly consider the decisions they take and record these so they are able to evidence the rationale for their decisions at a later date. For those companies which are not owner managed, directors should if possible look for the backing of shareholders for the decisions they take.

The Restructuring team at Stronachs will be monitoring the changes and will provide updates. We are also at hand to support and guide companies and directors facing any of these issues.

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