What is Wrongful Trading?
Section 214 of the Insolvency Act 1986 (“IA 1986”) contains provisions relating to wrongful trading. The provisions aim to encourage directors of struggling companies to seek professional advice in order to minimise future losses and protect the company’s creditors from further harm.
A director may be guilty of wrongful trading where they “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”.
Moratorium on Wrongful Trading actions
Directors found guilty of wrongful trading can be made personally liable for the debts they incur on behalf of the company during the relevant period. In the current economic landscape, many directors who are trying to rescue their business (and save the jobs of their employees) would be putting themselves at risk of wrongful trading and potential personal liability.
As such, the government announced on 28 March 2020 that there would be a suspension of the wrongful trading provisions retrospectively, starting from the 1 March 2020 and ending three months later. This was done to enable directors to trade during the pandemic without needing to fear the ugly spectre of personal liability rearing its head. This was enacted in s. 12 of the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”).
The continuation of the COVID-19 pandemic has put even the healthiest business under strain. Consequently, the three-month suspension was extended by a further three months to 30 September 2020 as the UK economy continues to resuscitate.
The End of the Moratorium
The relevant period specified in s. 12 CIGA 2020 has now come to an end on 30 September 2020 and the government has made no announcement suggesting that this period will be further extended.
Directors therefore now need to consider the financial position of their company and its ability to trade through October, and should be aware that their actions over the coming months may once again be subject to the wrongful trading provisions.
It is also imperative that a director seeks professional advice at the earliest signs of financial difficulty to enable a greater chance of a successful rescue or at the very least to minimise the harm to creditors.
Continuing to trade without being capable of paying debts as they come due puts creditors in a worse position than they would have been had trading stopped. This is considered to be a serious insolvency offence and is something taken into account by the Insolvency Service when conducting a review of a director’s conduct.
If you are a company director and the resurgence of wrongful trading provisions concerns you or if you are looking for restructuring solutions to recover from the financial impact of COVID-19, then please contact me or a member of our Insolvency Team.
