Changes to Wrongful Trading - Further Extension

The coronavirus has hit businesses hard; many are struggling to survive, and many others have had to close their doors for good. The government has been keen to bring in measures aimed at helping businesses and on 28th March, they announced temporary changes to the UK insolvency framework

Those changes retrospectively suspended wrongful trading provisions for company directors and were backdated to 1st March.

As time went by and the full effect of the pandemic on the economy became apparent, the suspension was extended again to 30th September. Now, with the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020, published on 26th November, the suspension has been extended again to 30th April 2021.

What is wrongful trading?

A director of any company is bound by both statutory, common law and fiduciary duties. All of these duties are important, but arguably the most important is the duty to act in the best interests of the company and its members. However, at the point where a company becomes insolvent (which means it is unable to pay its debts as they fall due), the emphasis changes and directors are required to consider and act in the best interests of the company’s creditors. Any failure to do so could be considered ‘wrongful trading’.

The wrongful trading provisions are contained in section 214 of the Insolvency Act 1986. Where ‘at some time before the commencement of the winding up of the company, that person [a director] knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’, the director should act to protect the interests of the company’s creditors. This may involve stopping the company from trading and seeking urgent insolvency advice.

If a director allows a company to continue to trade when they know - or at least ought to have known - that there is no reasonable prospect of the company being able to continue to trade and the company goes into insolvent liquidation, the director may be found personally liable for the debts incurred by the company during that time. To enforce this, the liquidator may apply to the court for a declaration that the director is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.

Mirror provisions are provided for administrators should a company enter insolvent administration before liquidation.

It should be noted that wrongful trading is distinct from the much more serious ‘fraudulent trading’. Fraudulent trading relates to situations where a director has caused a company to trade with a creditor in a deliberate attempt to defraud the creditor.

Purpose of the changes

The government intends that, rather than simply falling directly into insolvency, these companies will instead seek to continue trading and reach an agreement with their creditors, so that they can survive and then recover following the end of the crisis. The suspension of wrongful trading provisions - and thus potential personal liability for directors - will give them valuable breathing space to try and keep trading.

It should be noted that existing laws for fraudulent trading and disqualification of directors will remain in force and are unaffected by these emergency measures.