The Government has recently announced measures to prevent directors from incurring personal liability from wrongful trading during the COVID-19 outbreak. On the face of it, directors will be able to continue to trade with impunity but this article explains that this may not be the case.

Under section 214 of the Act (Wrongful Trading), a director may be required to pay compensation if the Company goes into insolvent liquidation and the Court concludes that the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration. In recent times this provision has been giving business leaders and advisors a headache, with hard-pressed businesses having to balance the desire to take up Government support and continue trading against the risk of personal liability if the business later collapses. 

The Government has been at pains to stress that it will not let viable businesses fold as a result of the pandemic.  The relaxation of the wrongful trading provisions is a logical next step.  The precise terms of the implementing legislation have not yet been published however the changes will take effect with retrospective effect from 1 March 2020 and last for three months. The Government has also said that the changes may be extended if necessary.

Notably, the wrongful trading provisions will be suspended for all companies and not those only directly affected by the pandemic.   The blanket approach adopted by the UK Government has the benefit of simplicity, but there remains a risk of abuse by companies that were financially precarious prior to the pandemic and which may now think themselves free to trade with impunity.

It would be a mistake however for directors to trade with little respect for their creditors’ wellbeing for the following reasons:

  • The fraudulent trading provisions under section 213 of the Act will continue to apply.  If a company’s business is carried on with intent to defraud creditors or for any fraudulent purpose, there will remain the prospect of recourse to directors or any other parties who were knowingly parties to carrying on the business.
  • The directors of a company which is insolvent or in the zone of insolvency will continue to owe their duties primarily to the company’s creditors rather than its shareholders.  More than ever at this time, directors will need to take professional advice and minute their decision-making to demonstrate that proper account has been taken of creditors’ interests when making major decisions.  Careful consideration will need to be given to whether there is a greater than ordinary business risk of the business failing, and of the interests of creditors in major decisions.
  • The directors’ disqualification rules will continue to apply.  If a director or former director of an insolvent company is found to have engaged in conduct which makes him unfit to be concerned in the management of a company, he is likely to be disqualified or accept a disqualification undertaking. 
  • The antecedent transaction provisions will also continue to apply – preferences, transactions at undervalue, transactions defrauding creditors.  Given that more companies will now be insolvent within the meaning of section 123 of the Act, it is likely that more transactions will come under the microscopes of liquidators in the months and years ahead.
  • The misfeasance provisions will continue to apply – enabling liquidators to bring summary proceedings for breach of fiduciary or other duty.  In recent years there has been a pick-up of such claims as litigation funders have moved into the market; that seems unlikely to diminish.

In summary, directors continuing to trade their companies until 1 June 2020 without sufficient regard for their creditors and knowing that there is no possibility of avoiding insolvency will still leave the directors personally liable for Company debts under the Insolvency Act provisions described above.

If you are concerned that you are in breach or may be close to breaching one of the above sections of the Insolvency Act seek specialist advice.

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