The Restructuring and Insolvency Reforms: What You Need to Know - Wrongful Trading


Wrongful Trading

At the end of April, the Business Secretary announced a relaxation of the law around wrongful trading. It was understood that wrongful trading law would be suspended, effectively allowing directors to continue to trade, knowing that the business would not be able to repay its debts, immune from consequence.

This highly publicised announcement was a good news story, the Government would support UK business, and allow directors to keep the companies trading during the current crisis. However, the measures as set out in the Corporate Insolvency and Governance Bill (the “Bill”) do not quite live up to expectations.

What do I need to know?

The Bill suspends liability for wrongful trading between 1 March 2020 and 30 June 2020 (or a month after the Bill comes into force ('the relevant period'). This period can be extended for up to six months at the discretion of the Secretary of State.

In consequence if a court is considering whether to order that a director should contribute to the company’s assets under the wrongful trading provisions, it will not take into account any “worsening” of the company’s financial position during the relevant period.

The Bill provides an assumption that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period.

I am a director, what does it mean for me?

The promised 'suspension of wrongful trading' legislation and thus the threat of directors’ personal liability is, on review of the detailed proposed legislation, of less assistance to directors than may otherwise have been the case.

An action for wrongful trading will be commenced only on the liquidation or administration of the company, where insolvent liquidation was inevitable and the directors continued to trade, causing loss to the creditors.

Where a director is found liable it is open to the court to make an order that he compensates the company to a level as the court thinks fit. This level of compensation generally, but not always, equates to the loss caused from the point of inevitable insolvency to the date of liquidation/administration.

It would have been open to the director in any event to argue that the losses were not attributable to their actions to continue trading but an unavoidable effect of company's business being disrupted by COVID-19. As a result, the proposal puts this form of 'defence' in statutory form.

At best the legislation gives comfort to those directors who are currently questioning whether insolvent liquidation is inevitable and thus whether they should cease trading and commence an insolvency process.  

For the individual director it should be remembered that all other legislation and duties remain in place and as a result misfeasance/wrongdoing during this period of suspension would be caught in any event. We therefore strongly advise that the Directors continue to seek detailed advice provided as to the ability to continue to trade, irrespective of this temporary suspension of wrongful trading legislation.

It should also be noted that the provisions do not apply to a variety of different sectors, including the financial sector.

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