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The UK could see a “substantial increase” in companies that collapse after the government decided not to extend a key insolvency measure, according to a statement from the Institute of Directors released on Wednesday.
The UK government did not renew the suspensions of ‘wrongful trading’ rules for company directors in its Winter Economy Plan last week.
“The failure to extend this measure sends a bad signal to directors across the country, and risks opening the door to a wave of avoidable insolvencies,” said Roger Barker, director of public policy at the IOD.
Prior to the pandemic, directors were legally obliged to cease trading if their company faced insolvency under the Insolvency Act 1986. Failing to do so could bring financial or legal liabilities.
The protection, which was part of wider efforts by the government to give businesses “much-needed breathing space during the coronavirus pandemic,” runs out on Wednesday.
The IoD is pressing the government to extend the measure to the end of the year, in line with other insolvency measures that were renewed last week.
“Many directors, particularly in sectors like hospitality, tourism, and events, still have little clarity on the long-term viability of their companies due to the pandemic and public health measures,” said Barker.
“The suspension of these rules has given business leaders greater confidence to press on and seek a way through the uncertainty for their organisation and staff. Now, the message to businesses against the wall appears to simply be to shut up shop.”
The UK government introduced emergency coronavirus legislation in June. Among the new rules was a time-limited suspension of director liability for wrongful trading that applied from 1 March to 30 September 2020.
“It is vital that we continue to deliver certainty to businesses through this challenging time, which is why we are now extending these important and necessary measures to protect companies from insolvency,” said UK business minister Lord Callanan in a statement last week.
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