COVID- 19: Wrongful Trading Suspension - But Directors Beware
- AuthorAndrew Meech
In addition to various funding packages introduced by the Chancellor in recent weeks, along with the Furlough Scheme to be implemented via the PAYE system, businesses and in particular directors, have been given a suspension of the wrongful trading provisions contained within the Insolvency Act 1986 (the “Act”).
The period of the suspension will initially last for 3 months and will work retrospectively from 1 March 2020 but the intensification of this pandemic will surely see an extension to the initial period - indeed the Government has said it will keep matters under review.
Under Section 214 of the Act directors can find themselves personally liable and be required to pay compensation if the company that they operate enters 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 addition, the Companies Act 2006 sets out a clear duty on directors to place the interests of creditors as paramount to those of the company shareholders when the business is on the verge of insolvency.
The duty towards the interests of creditors, the pressure of employees’ livelihoods and the prospect of facing personal liability has understandably caused many directors much angst - it is not easy balancing the risk.
The suspension of the wrongful trading provisions does not discriminate – it applies to all businesses irrespective of size or sector but it would seem that directors of SME’s will particularly benefit.
Directors should not rest on their laurels due to a number of reasons. For example, the fraudulent trading provisions under Section 213 of the Act remain in force, the duty to place creditor interests as paramount will continue to apply, directors will continue to face disqualification proceedings if they are involved in conduct which is considered to make them unfit to manage a company and officeholders will continue to have the ability to challenge certain transactions (preference payments to creditors, transactions at an undervalue and/or those which defraud creditors) and also bring misfeasance proceedings against directors if considered appropriate.
Whilst the change will be of welcome news to directors that are grappling with the ongoing viability of their business (many of those being sound businesses prior to this pandemic), directors must continue to be wary of the prospect of personal liability. It would seem that now more than ever is the time for directors to take professional advice regarding the decisions that they make and to clearly document the reasons for their decision making.
Andrew Meech is a Director in JCP’s Business Litigation team. He has extensive experience in advising both directors and officer holders in relation to the provisions of the Insolvency Act 1986. Andrew is well placed to advise directors who may wish to understand more about how best to protect themselves from personal liability.
Andrew can be contacted on firstname.lastname@example.org or on 01792 525 419 or contact one of our local offices below…
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