As things begin to return to some form of "normality", businesses might begin to feel some sort of relief. However, the inevitable consequence of normality returning is that some of the temporary rules that have been put in place to assist businesses through these difficulties will fall away.
Since the pandemic first took effect, there have been a number of temporary legal measures introduced. These have worked in tandem with the Government financial support measures (e.g. furlough, bounce back loans, VAT deferrals etc.) and have undoubtedly reduced the number of companies that have gone into insolvency since the start of the pandemic (and indeed have probably prevented the insolvency of a substantial number of companies that would have gone bust, even without a pandemic).
Many of these temporary restrictions are currently due to come to an end on 30 June 2021. However it should be noted that over the past year these temporary restrictions have been extended (often at short notice) and it is always possible that they will be extended again. If "normality" is returning, it is less likely that the restrictions will be extended again. However, directors need to be aware that the restrictions listed below are scheduled to expire on the dates noted below and they should be considering now what the effect of the lifting of these protections will be on their businesses.
The restrictions:-
1. The current suspension on the use of statutory demands as a basis for winding up a company - end date 30 June 2021.
2. The suspension of a creditor's ability to wind up a company (unless broadly the creditor can show that the pandemic has had no adverse effect on the business, or that the company would have gone bust even ignoring the effect of the pandemic on the debtor business) - end date 30 June 2021.
3. The suspension of wrongful trading liability. Lockdowns would inevitably have meant that many businesses would be wrongfully trading. Directors would therefore have been at risk of personal liability if they did not put their companies into insolvency. To prevent mass insolvencies, the Government effectively suspended the possibility of wrongful trading liability for directors in respect of the period after 1 March 2020. That period is scheduled to end on 30 June 2021 and so, from 1 July 2021 the "wrongful trading clock" begins ticking again and the risk of personal liability for wrongful trading reverts to the pre-pandemic position. No doubt many companies will be in an extremely distressed financial position as a result of the events of the pandemic, and directors need to be aware that the risk of personal liability for wrongful trading is a live issue again - end date 30 June 2021.
(For the sake of completeness:- (1) it should be noted that the general fiduciary duties that directors owe were not suspended at the same time as the wrongful trading liability suspension and accordingly anything that may have happened since March 2021 that would constitute a breach of fiduciary duties is still a live risk for the directors; and (2) the wrongful trading suspension was not in place between 30 September 2020 and 26 November 2020 - so directors theoretically remain at risk in respect of that period.)
4. A landlord may not irritate a commercial lease for monetary breach (typically, non-payment of rent) unless the breach has continued for at least 14 weeks (the "normal" pre-pandemic position is 14 days). That restriction on landlord enforcement will remain in place until 30 September 2021. Companies with large arrears of rent should be considering now how they will address such arrears with their landlords. It is a very difficult market for landlords at the moment and many landlords may well be open to a compromise if the alternative is losing a tenant and being left with empty premises - end date 30 September 2021.
Dividends in difficult times
One of the obvious effects of the pandemic has been that the profits (and reserves) of many companies have simply been wiped out. One point to think about when advising owner managers is that many of them are typically "remunerated" through a mix of salary and dividend (because it is tax-efficient). But that approach is dependent of course upon the company generating profits to allow the payment of dividends. If there are insufficient profits to justify lawful dividends, any sums paid out will be treated as loans due by the directors to the company and in the event of the company going into insolvency, a liquidator or administrator will require any overdrawn loan accounts to be repaid. That often comes as a surprising shock to the directors who may not really have understood that what they were receiving was not just an ordinary wage. Given the obvious difficulties that many companies are facing, the manner in which directors are taking their remuneration needs to be considered to ensure that it continues to be appropriate in the circumstances.
