In case of Covid-19 emergency break glass: the court’s ultimate discretion in bankruptcy and winding-up

9th April 2020 Restructuring & Insolvency

The courts routinely make orders for bankruptcy and winding-up where the debtor is insolvent and unable to pay its debts.

Despite the best efforts of the Government to assist businesses and individuals there will inevitably be what some may consider to be ‘unjust’ insolvency proceedings directly arising from the Government’s suspension of a large part of the economy or otherwise caused by the Covid-19 pandemic.

In any insolvency proceedings, even where the statutory conditions are satisfied, the court retains the ultimate discretion not to make a winding-up or bankruptcy order, with all the adverse consequences (and burden on the Insolvency Service) that such an order entails.

It is a discretion which is rarely exercised: but exceptional times call for exceptional means, as has been seen in recent weeks with, for example, the proposal to suspend wrongful trading provisions applicable to directors for a temporary period.

However, the judicial discretion is subject to established legal principles (such as bankruptcy serving no useful purpose) and so those principles would need to be developed to deal with the current issues or otherwise superseded by legislation.

Such exercise of discretion would not relieve the debtor from liability and all other enforcement options would be open to creditors.

One can see situations where an order for winding-up or bankruptcy would be unjust: for example a small hairdresser business which has been forced to cease trading but has continued to accrue liabilities to the landlord under the lease, and local authority for business rates. There may be no other creditors and the local authority prepared to write off its debt. The sole trader or company may have no or limited assets. In those circumstances, it may be more just to dismiss insolvency proceedings than allow them.

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Adam Taylor is a Partner located in Londonin our Restructuring & Insolvency department

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