Coronavirus & Changes to Wrongful Trading Laws

Wrongful Trading will only apply when the directors of a company have continued to trade a company past the point when they:

  • “knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation”; and
  • they did not take “every step with a view to minimising the potential loss to the company’s creditors”

An action for Wrongful Trading can only be brought by the company’s liquidator.  If directors are found guilty of Wrongful Trading they can be held personally liable for the increase in the company’s debts from the point they knew the company was insolvent.

The UK government has announced new insolvency measures to prevent businesses, which may now be unable to meet debts due to the enforced closure of operations, from being forced into insolvent liquidation.  The Business Secretary announced that the Wrongful Trading law would be suspended to protect directors during the Coronavirus pandemic. The intention is that this will allow directors of companies to pay staff and suppliers even if there are fears the company could become insolvent during the period of inactivity.

It is proposed that the suspension of the Wrongful Trading provisions will be applied retrospectively from 1st March 2020 for a period of three months.

The intention is that directors of companies that are struggling and are on the brink of insolvency will now be able to continue buying supplies while attempting to find a rescue package. This “breathing space” will mean that company directors can keep their workers employed and businesses going until such time as normal trading patterns are resumed.

Matthew Fell, chief UK policy director at the Confederation of British Industry (CBI) said: “The CBI welcomes these interventions at a critical time for business. The temporary suspension of Wrongful Trading provisions, along with other measures, will give much needed headroom for company directors to enable otherwise viable businesses to use the government’s support package and weather this crisis.”

The British Chambers of Commerce (BCC) also agrees. BCC head of economics, Suren Thiru, said: “It is right that the rules on Wrongful Trading are temporarily suspended. Companies that were viable before the outbreak must be supported to ensure they can help power the recovery when the immediate crisis is over.”

However, a word of caution as the announcement has also been met with some apprehension. Duncan Swift, president of insolvency and restructuring trade body R3, commented: “The profession will have some serious concerns about the government’s plans to suspend Wrongful Trading. A blanket suspension could risk abuse. The provisions are there for a reason and to protect creditors.”

It is clear that in these worrying times, any assistance that can be made available for business owners in order to protect directors, businesses and employees’ jobs must be applauded. The Government’s announced strategy will definitely help some businesses survive.  However, it is now more important than ever that any director with concerns about their company should seek professional advice at the earliest opportunity.

The information in this article is based on our understanding on the 20th April 2020. If you’re facing insolvency and need assistance you can contact Paul on paul.ward@bulleydavey.co.uk.