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Coronavirus: wrongful trading - a (bit of a) break for directors

Last Saturday (28 March 2020), Business Secretary Alok Sharma announced changes to UK insolvency law as part of the Government’s response to the Coronavirus pandemic. Mr Sharma said the changes would give businesses “extra time to weather the storm”.   

One of the key proposals is that directors will not face claims for wrongful trading under the Insolvency Act.  The changes will be back-dated to 1 March 2020 and are expected to last for 3 months.   

Currently, 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.  To avoid personal liability, directors facing a wrongful trading claim will try to show they took every step with a view to minimising potential loss to the company’s creditors.   

Over the years, the Courts have recognised that 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.  The proposed changes remove that threat altogether, addressing concerns that directors taking ‘every step’ to minimise potential loss would conflict with the Government’s encouragement to businesses to ride out the crisis. 

However, the temporary relaxation of wrongful trading provisions does not give directors carte blanche. Directors retain their Companies Act 2006 and other legal and equitable duties, and must continue to act in the company’s best interests, failing which they expose themselves to misfeasance claims. The fraudulent trading provisions of the Insolvency Act will also remain in force, and directors can still face disqualification proceedings. Allegations of unfitness are often the same or similar to wrongful trading.  It is hard to see how a director could avoid a claim for wrongful trading yet still be disqualified for the same or a similar reason.  Only time will tell.   

Mr Sharma said the changes should encourage directors to take advantage of the financial packages on offer and ensure that “when the crisis passes” companies are ready to “bounce back.”   This too remains to be seen – in the meantime we continue to be in unchartered territory. 

For further information on this article, please contact our Restructuring & Insolvency team or visit the Coronavirus /COVID-19 area on our site. 

 

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