British companies struggling amid the coronavirus outbreak are to be given greater protection from bankruptcy under emergency changes to insolvency laws due to be unveiled by the government this weekend, the Guardian has learned.
Ministers are preparing to announce new measures to give firms greater leeway to continue trading as the economic costs of the Covid-19 outbreak mount, including offering them more protection from creditors in effort to prevent mass company failures and a sharp rise in unemployment.
Sources said the government planned a rapid shake-up of insolvency laws to bring in rules similar to chapter 11 bankruptcy in the US, which enable firms time to pay off their debts over time while remaining in business.
The sources said business secretary Alok Sharma would amend “wrongful trading” rules, which make it a criminal offence for a company director to keep on trading if they know the business is unable to repay its debts.
The government has already announced a series of unprecedented policies to try and prevent the downturn created by the pandemic turning into a slump, with Boris Johnson promising the nation would, “put its arms around every worker”.
News that 477,000 people had submitted new claims for universal credit earlier this week sparked fears that unemployment is already rocketing, as businesses who have had to close their doors as a result of stringent social distancing measures have laid off staff.
As growing numbers of companies come under financial stress as the government lockdown curtails social and economic activity across the country, the fresh steps could help to prevent normally healthy companies from going bust.
Experts said the reforms could also include a moratorium on the ability of company creditors to force firms to wind up their operations.
Roger Barker, head of corporate governance at the Institute of Directors, which has been pushing for changes, said: “A lot of companies will want to carry on and to maintain employment, take out emergency loans with government backing. But if at some future point they could be held personally liable for not putting their firms into insolvency, that may cause them not to carry on.”
“At the current time of emergency we need as many companies as possible to keep going, providing employment and providing goods and services keep the economy going.”
The radical shakeup of the bankruptcy regime would require legislation, and would be likely to require MPs to return to Westminster after recess, despite suggestions the Easter break could be extended.
Lib Dem leadership contender Layla Moran, who has called for a more lenient bankruptcy regime during the crisis, said that would be the right thing, if it allowed some firms to weather the storm.
“This change would require legislation but we would have the political will to make it happen. We must do this, jobs are on the line,” she said.
Some companies have been criticised for continuing to trade during the crisis – though there has also been widespread confusion about which economic activities must be curtailed as a result of the government’s rules.
In his dramatic broadcast on Monday evening, the prime minister urged the public to “stay at home”; but also said they could travel to work if their job is essential and they are unable to work from home.
The government has also so far declined to order construction work to halt, with Johnson insisting he does not want to “shut down the economy”.