Over the weekend, Business Secretary Alok Sharma announced a relaxation of insolvency law and specifically, the law around wrongful trading. In essence, the government has said that wrongful trading law will be suspended to protect directors during the ongoing COVID 19 pandemic. But what does this actually mean, and what is the effect of the change?
Firstly, when is a company insolvent?
A company is deemed to be insolvent when:
- it is unable to pay its bills as they fall due; or
- when the company's total liabilities exceed the total value of its assets.
And what exactly is wrongful trading?
- Wrongful trading happens when a company director keeps on trading when they know the business is unable to repay its debts. It is a civil offence under the Insolvency Act 1986 and the Companies Act 2006.
- Wrongful trading happens when a company director continues to trade when:
- They knew, or they ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation; and
- They did not take every step they could to minimise the potential loss to the company’s creditors.
- If a company continues to trade while knowingly insolvent, this can lead to accusations of wrongful trading. If a director is found to be guilty of wrongful trading, they can be held personally liable for the company’s debts from the point they knew the company was insolvent.
So how has the law changed?
- It is not that the law has changed, rather the wrongful trading rules will be suspended in an effort to see companies through these challenging times.
- While the new legislation has not yet been published, it is understood that there will be a relaxation of the law around wrongful trading. This should help companies to continue to trade without fear of acting outside the law.
- For example, company directors will be allowed to continue to pay staff and suppliers, even if they fear that the company could become insolvent.
- Further, there will be a temporary moratorium for businesses undergoing restructuring processes. This means that they cannot be put into administration by creditors, and they will be allowed access to supplies and raw materials.
When will this come into effect?
The Business Secretary has said that the relaxed approach to wrongful trading law will apply retrospectively, from the beginning of March 2020.
I am a director. What do I need to do?
- Consider your company's financial position carefully. Which payments are essential? What bills needs to be paid? What steps can be taken to keep the business going? Ensure that you act in the best interests of the company at all times.
- Bear in mind that, even if your company is technically insolvent, the suspension of wrongful trading law means that there is greater scope for you to continue trading. Remember that you still need to comply with your director's duties as usual.
- Keep up to date with developments. The new legislation is expected imminently, and it will be important for you to understand what it means for you and your business.