Mon 07 Dec 2020

The Re-Suspension of Wrongful Trading Liability

Earlier this year the UK Government introduced a number of temporary measures intended to avoid large scale insolvencies across the country.   One of these measures was the suspension of wrongful trading liability. 

This suspension was in place until September 30, 2020.   Most of the other temporary measures were extended (e.g. the effective suspension of winding up petitions by creditors has been extended until December 31, 2020) but the suspension of wrongful trading liability was not extended.  

However, the Government has now decided that it should again suspend wrongful trading liability and this is now in place from November 26, 2020 until April 30, 2021.

So what does this mean?

Concern about personal liability for wrongful trading is one of the main drivers for directors when they decide to put a company into formal insolvency.    Personal liability can arise under section 214 of the Insolvency Act 1986 if the directors knew or ought to have known that a company could not reasonably expect to avoid insolvency but nonetheless did not take every step practicable to minimise the ensuing loss to creditors.   The risk of being personally liable is a strong motivating factor for ensuring that directors act responsibly when a company is in distress and the provision aims to ensure that directors do not continue to trade at a loss and thus prejudice creditors further.  

The suspension of wrongful trading liability means that this is no longer a concern for directors for the periods when wrongful trading liability has been suspended. Those periods are:-

(i) March 1, 2020 until September 30, 2020; and

(ii) November 26, 2020 until April 30, 2021.

There are two things worth noting here:-

(a)        there is an obvious "gap" period October 1, 2020 until November 25, 2020 when the wrongful trading provisions would still apply.  Whether that gap period turns out to be significant in any future proceedings for wrongful trading will remain to be seen but, if it is, the factual arguments will no doubt be interesting; and

(b)        as was the case in the earlier period of suspension, this is not a suspension of all directors' duties but rather only the risk of liability for wrongful trading. The fiduciary duties that are incumbent upon all directors remain in place and directors should not look at the suspension as being a "get out of jail free card" for everything and anything that they might consider doing (or indeed not doing) in these strange times.

Once again, one would suspect that the measure is intended to "calm the markets" to try to keep formal insolvencies at as low a level as possible, no doubt in the face of the current impositions of more stringent lockdowns than we saw in late summer/early autumn.

It remains the duty of directors at all times to act in the best interests of the company, and, where the company is insolvent or near-insolvent, to act in the interests of creditors. It is to be hoped that the suspension of wrongful trading liability is not seen by the unscrupulous as an opportunity to take advantage of creditors.

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