Wrongful trading - temporary relief for directors

On 20 March 2020, the UK Government published its Corporate Insolvency and Governance Bill (the “CIGB”). When enacted, the new legislation will see the most extensive reforms to the UK’s restructuring and insolvency regime in more than 15 years.

The CIGB introduces both (a) permanent reforms and (b) temporary reforms specifically designed to ease the burden on companies and directors caused by the Covid-19 pandemic. One change in the latter category relates to the personal liability of directors.

Under current law the Insolvency Act 1986 (IA), once a director of a company concludes that there is no reasonable prospect of the company avoiding an insolvent liquidation or an insolvent administration, the director has a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors (section 214 IA). If the court deems that a director failed in this duty, the court can order the director to make such personal contribution to the company’s assets as it thinks proper assuming the conduct is considered to have led to a net deterioration in the company’s assets. Given the impact that UK businesses are contending with in the wake of the Covid-19 pandemic, there would be many thousands of directors who feel themselves exposed to this offence.

This potential personal liability for wrongful trading has been suspended from 1 March 2020, until the later of (a) 30 June 2020 and (b) one month after the CIGB has been enacted (the “relevant period”). Courts will ignore the actions of a director during the relevant period when assessing the amount of compensation payable by a director who is later found liable for wrongful trading. All other duties of and potential offences by directors of UK companies continue to apply. There is the potential for the Government to further extend this relevant period.

Normally directors run the risk of disqualification under section 10 of the Directors Disqualification Act 1986 if they participate in wrongful trading. However this only applies if the Court has made a declaration that they are liable to make a contribution to the company’s assets. By significantly reducing the risk that da director may be found responsible for any worsening of a company’s financial position the modifications should correspondingly reduce the risk of disqualification as a result of a finding of wrongful trading at least to the extent the finding relates to judgements and conduct falling within the relevant period rather than before or after.

Despite these temporary protections, directors will continue to have a duty to act in the best interests of creditors if the company is insolvent or likely to become insolvent. In addition misfeasance claims 206-212 IA), fraudulent trading (section 213 IA), and antecedent transaction provisions (sections 238, 239 and 423) will all remain relevant.

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