When the Corporate Insolvency and Governance Act 2020 (CIGA) was passed at the end of June, it became clear that the government’s initial announcements that the threat of wrongful trading would be removed altogether would not exactly be the case – so what changed, and how would a claim be brought?
It is well known that if a company goes into administration or insolvent liquidation and it appears the directors knew or ought to have known there was no reasonable prospect of avoiding that, the directors can be ordered to contribute to the company’s assets. Directors can defend wrongful trading claims on the basis they took "every step" with a view to minimising potential loss to the company’s creditors. If, however, they are unable to do so directors risk being ordered to pay some or all of the increase in the “net deficiency”.
There is no getting away from the fact claims for wrongful trading are time consuming and expensive. Over the years, the courts have recognised directors often have to make decisions in difficult circumstances and judges have been slow to find that, with the benefit of hindsight, the decision to carry on trading was wrong. As a result several claims for wrongful trading have failed and administrators and liquidators have instead favoured pursuing other claims against directors. Was the government removing a threat which in reality didn’t really exist?
The government’s initial announcements suggested the changes would remove the threat of wrongful trading altogether, suspending claims based on the 3 months from 1 March 2020 and addressing concerns about directors having to take "every step" to minimise potential loss conflicting with the government’s objective of encouraging businesses to ride out the crisis. However when CIGA was passed it became clear the courts would be required to assume the director was not responsible for the increase in the “net deficiency” during the 6 months from 1 March to 30 September 2020. [Since this article was originally published in September, the period has been extended several times and will now last until 30 June 2021].
The word “assume” rather than “presume” caused debate. Would there still an opportunity to argue the “assumption” was in fact incorrect and the director still liable for wrongful trading? The government made clear in parliamentary debates that any increase in the “net deficiency” during the 6 months should be left out of account, making it yet more difficult (although not impossible) to construct a claim spanning the 6 month period and beyond.
On the face of it, CIGA gave directors the opportunity to act with impunity. But this is not the case. Officeholders will continue to have misfeasance and fraudulent trading claims in their armoury for director misbehaviour during the Covid-19 period and, as discussed further in our previous article, directors can still face disqualification. It remains to be seen whether the courts will give greater latitude in relation to this exceptional period, or make examples of individuals who have sought to take unfair advantage of the temporary measures at the expense of others.