Wrongful trading rules temporarily suspended

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On 28 March 2020, the Business Secretary, Alok Sharma, announced changes to insolvency legislation in light of the current coronavirus pandemic. The most striking change announced is the temporary suspension of wrongful trading rules, with retrospective effect from 1 March 2020.

A director can be liable for wrongful trading if a company continued to trade when the director knew or ought to have known that there was no reasonable prospect that the company could avoid going into liquidation or administration, and the company becomes worse off as a result of that continued trading. The purpose of the wrongful trading rules is to stop directors continuing to trade companies beyond the point of no return.

Flexibility is, however, already built into the wrongful trading rules. A director will not be liable if he or she took every step with a view to minimising the potential losses to the company’s creditors.

A director found liable for wrongful trading may become personally liable for the extra debts incurred by the company during the period when it continued to trade. The risk of personal liability under the wrongful trading rules is often one of the key factors that directors consider when they decide whether it is okay to trade on, or whether they should seek the advice of an insolvency specialist.

The temporary suspension of the wrongful trading rules is clearly designed to allow directors more time and breathing space in the current climate.

The details of this proposed change to the Insolvency Act has not yet been published but, as an insolvency specialist, I have concerns about this particular measure. Whilst it’s entirely sensible to create mechanisms to support directors and companies in this extremely difficult period, changes to the wrongful trading rules are unlikely to be the best solution. The current wording of the wrongful trading legislation does not seek to penalize directors who are acting conscientiously, weighing up their decisions and taking advice from accountants or insolvency specialists where required. The danger of suspending the wrongful trading provisions entirely is that it risks abuse by those directors who have not acted conscientiously, and puts creditors of their companies at greater risk.

We will need to see how the full package of measures proposed by the government (of which the suspension of wrongful trading is just one) fits together. In the meantime, the best advice for directors is to keep navigating this difficult time with the assistance of their trusted advisors.