COVID-19 and the suspension of wrongful trading

On the 28 March 2020, the Government announced that it will temporarily suspend the offence of wrongful trading by directors, for 3 months from the 1 March 2020.  Given the unprecedented challenges that many companies are facing, this will come and as welcome aid.

What is wrongful trading?

Under existing insolvency laws, if a director knows (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation/administration, they have a duty to take very step, which a reasonably diligent person would take, to minimise loss to the company’s creditors.  If they fail to do so, and the company goes into insolvent liquidation/administration, then a court can make those directors personally liable for the liabilities of the company.

Why is the suspension helpful?

Since the outbreak of the coronavirus and the stringent measures that the Government have imposed, the inability for many business to trade, combined with the inability to forecast when trading may commence again, has meant that many directors of small and medium sized business have felt extremely exposed, fearing that they would need to commence formal insolvency processes.

The proposed suspension, will now grant directors much needed time, to work out the best way forward for their businesses.  It will also allow companies to pay their staff and suppliers, without being accused of increasing losses to creditors.

What about director’s duties?

Despite the suspension of wrongful trading, the Government has emphasised that “all the other checks and balances that help to ensure directors fulfil their duties properly with remain in force”.  The most significant of these is directors’ duties and in particular section 172 of the Companies Act 2006.

Under section 172 of the Companies Act 2006, when a company is close to insolvency, a director must consider the interests of creditors and further, must not prefer some creditors over others.  Such duties can also be enforced personally against the directors.  However, the difference here, is that the focus is on particular actions of the directors, rather than on the whole period of trading.  Directors who take reasonable, good faith decisions to try and balance the interests of the company, its employees and its creditors are unlikely to face any claims for personal liability.

For more information on the issues raised in this article or if you have any other questions relating to the running of your business in these unprecedented times, then please contact a member of our corporate and commercial team on 01524 548494 or 01228 552600.

This alert does not provide a full statement of the law and readers are advised to take legal advice before taking any action based on the information contained herein.

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