Changes to Wrongful Trading Laws During COVID-19
Protection from personal liability for directors of UK companies trading through the COVID - 19 crisis.
The UK government announced on Saturday, 28 March 2020 that it intends to amend insolvency law to suspend the offence of wrongful trading during the COVID-19 crisis.
Presently, where a company has gone into an insolvent liquidation, the Courts can hold a director personally liable to compensate creditors if the company continued to incur debts after the point in time when the director knew, or should have realised, that there was no reasonable prospect of the company avoiding that insolvency (section 214 of the Insolvency Act 1986). In those circumstances, the director's duty to promote the interests of the company switches to a duty to protect its creditors and they must take every step necessary to minimise potential losses. The level of personal liability is generally equal to the amount by which the creditors' losses would have been reduced if "every step" had been taken to minimise those losses from the point at which insolvency was likely. The purpose of the provision is to ensure that companies do not continue trading after they have become insolvent and the potential for personal liability is often the decisive factor in the decision to start an insolvency process.
As part of a package of measures to help businesses to survive the pandemic crisis, the government has announced that these wrongful trading provisions will be suspended for 3 months from 1 March 2020. That period could be extended.
The government's stated aim of the suspension is for directors to keep their businesses trading during the pandemic, paying staff and suppliers, even if there are insolvency fears. To rely on the protection afforded by the suspension of the wrongful trading rules, directors are likely to have to be able to demonstrate that the business was solvent prior to the crisis and that it would have remained viable except for the financial impacts caused by the pandemic. They will also need to demonstrate that their objective in continuing to trade and incurring additional debt was to pay staff and suppliers and to maximise the prospects of the company's survival post-COVID. However, legislation is necessary to effect this change in the law and the detail of that will not be known until after parliament returns from its Easter recess which is currently scheduled for 21 April 2020 although the recess might have to be extended.
As things stand therefore directors still have to exercise caution and to demonstrate that they are keeping on top of financial disciplines as well as treating creditors fairly (so as to avoid an allegation of fraudulent trading). It will however provide some comfort and encouragement to directors of companies that will need to access finance to survive the crisis particularly through the government's Coronavirus Business Interruption Loan Scheme.
These are still turbulent and tricky waters to navigate and if specific advice about particular circumstances is required please contact our corporate team via Sean Byrne or our litigation team via Jon Wilby .
30 March 2020
Disclaimer -This article contains information on current legal issues applicable at the time of printing. Please note there may have been changes subsequently which have not been incorporated into the material. This article is intended for information purposes only and its content should not be applied to any particular set of facts or relied upon without legal or other professional advice.