Barry Stancombe considers the Temporary Suspension of Wrongful Trading
On Saturday 28 March 2020, the Business Secretary announced new legislation would be introduced to grant a temporary suspension for 3 months of the wrongful trading provisions, which would take effect retrospectively from 1 March 2020.
Following the outbreak of Covid-19, directors have become extremely concerned about the risk of personal liability that can arise in respect of wrongful trading.
Under S.214 of the Insolvency Act 1986 a director can be liable if he is found to have continued trading a business and did not minimise losses to creditors at a time when he knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration and with that knowledge then failed to take every step to minimise the potential loss to the company’s creditors that he ought to have taken
Alok Sharma, the Business Secretary, said the wrongful trading law would be suspended to protect directors during the pandemic to allow directors of companies to pay staff and suppliers even if there was a genuine fear that their company could become insolvent.
But it is worth noting however:
The UK Government has yet to produce details of the intended legislation.
Directors will remain liable for wrongful trading leading up to the retrospective date.
Directors are still at risk of misfeasance provisions under section 212 of the Insolvency Act 1986.
Directors will remain liable for fraudulent trading under section 213 of the Insolvency Act 1986 if they knowingly carried on a business with the intent to defraud creditors or for any fraudulent purpose.
The directors’ disqualification rules still apply.
Other statutory provisions continue to apply such as transactions at undervalue, transactions defrauding creditors, unlawful preferences etc.
This note will be updated when the intended legislation is published.
BARRY STANCOMBE
If you would like to know more, or instruct Barry Stancombe, please contact the Practice Directors.