Unwinding Government Support – What Should Directors Do Now…

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 through 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 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.

For more information, please do not hesitate to contact any of the Brown Rudnick restructuring team.