Application of Insolvency Law in an Influenza Pandemic
The policy behind the insolvent trading provisions in the Companies Act 1993 is to "encourage efficient and responsible management of companies by allowing directors a wide discretion in matters of business judgment while at the same time providing protection for shareholders and creditors against the abuse of management power".
There is likely to be a significant reduction in economic activity in the event of an influenza pandemic. Many companies will be faced with liquidity pressures due to reduced revenue. During and immediately following a pandemic companies may be unable to meet their debts as they become due in the normal course of business, thus rendering the company technically insolvent. Directors will have to consider whether the company must cease trading.
Where a company can not pay its debts as they fall due and there is no legitimate expectation of improvement, the law encourages directors to minimise loss to creditors and cease trading. If the directors continue to trade with no prospects of improvement then they may be personally liable for creditors' losses.
Just because a business is unable to pay its debts as and when they fall due does not mean that the company must cease trading. Companies often move in and out of solvency based on seasonal fluctuations. In the case of a pandemic, if a director genuinely believes that the insolvency of a company is a temporary circumstance which is likely to be restored when business improves following the pandemic, then there is no legal obligation on the directors to liquidate. However, should circumstances change or the directors believe that the business has no reasonable prospect of recovering post-pandemic they should resolve that the company cease trading in order to protect creditors from further loss.
In the event of a pandemic, directors will have to assess the ability of the company to recover post-pandemic. In particular, the directors should:
- maintain accurate accounts and financial records so that the directors clearly understand the company's financial position;
- treat all creditors equally (in particular they should limit distributions to shareholders or related party creditors);
- demonstrate a degree of "belt-tightening" and forward planning; and
- obtain professional legal and accounting advice if it is available.
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