02 April 2020

On a normal day, directors can be held personally liable for wrongful trading in an insolvency situation. In the current Coronavirus pandemic, our days are not normal. In response to the effect the Coronavirus pandemic may have on companies, the UK Government has announced that it will temporarily suspend the wrongful trading provisions for company directors.

Section 214 of the Insolvency Act 1986 provides that directors will be personally liable if they continue to trade when they know the company is insolvent, thus increasing the debts of the company. The effect of the Government’s announcement is that it is intended that there is now no threat of personal liability for wrongful trading during the Coronavirus pandemic. In addition, it is understood that the legislation will apply this retrospectively from 1 March 2020 for three months. The Government has assured that directors have the security and certainty required to react to the current climate.

The Government’s actions support Chancellor Rishi Sunak’s pledge to deliver “whatever it takes” to keep companies solvent. Companies are intended to be able to now take actions that would ordinarily need to be duly considered against the wrongful trading provisions of the Insolvency Act 1986, including continuing to buy supplies such as energy, raw materials or broadband. The Government seeks to ensure that companies are able to pay staff and suppliers, even if there are fears the company could become insolvent.

The UK Government is not the only jurisdiction in which such relaxations are occurring. Similar measures have also been introduced in Germany and Australia. Germany has introduced legislation which releases companies in financial distress from their obligations to file for insolvency. A company in Germany should only file for insolvency if the insolvency is not caused by the effects of COVID-19 or there is no prospect of recovering from cash flow insolvency. Likewise, Australia’s government has announced a six month softening of insolvency legislation. The measure will allow directors to incur debts in the ordinary course of business. Incurring such debts would ordinarily give rise to personal liability of the directors in an insolvency situation.

The British Chambers of Commerce have welcomed the announcement, as this suspension will ensure that directors are not penalised for doing all they can to save companies. It is not, however, a free pass to trade on without any consequences. Whilst the rules on wrongful trading have been relaxed, those on fraudulent trading have not. Directors must still act in line with their fiduciary duties and the threat of director disqualification will remain in force as a deterrent against director misconduct. Notwithstanding, the relaxation of insolvency legislation allows directors room for manoeuvre during the COVID-19 outbreak.

Contact

Scott Wyper, Partner: E: swy@bto.co.uk  T: 0141 221 8012