Covid-19 – Wrongful Trading Rules Suspended. But, Our Insolvency Solicitors Advise that Directors of Failing Companies Still Need to Tread Very Carefully
The message we want Directors to take from this article is that Directors of failing or troubled limited companies still need to tread very carefully, even though the Wrongful Trading Rules have been temporarily suspended due to Covid-19. Our Insolvency Solicitors explain why Director Disqualification investigations and Misfeasance Claims remain a significant risk for Directors of failing companies.
What is Wrongful Trading?
Once a Director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors.
If, after the company has gone into insolvent administration or liquidation, it appears to the Court that a Director has failed to comply with this duty, the Court can order the Director to make such contribution to the company’s assets as it thinks proper. In other words, personal liability for the director can be the result. This usually happens on application to the Court by the Liquidator of the company.
Our Insolvency Solicitors Explain What has Changed, and Why
In response to the COVID-19 Pandemic, the Business Secretary announced, on 28th March, the temporary suspension of the wrongful trading provisions for three months with retrospective effect beginning on 1st March 2020. This measure has been taken to help remove the threat to Directors of incurring personal liability for company debts, during the Pandemic. It is a step intended to incentivise businesses not to fail and to give some – very limited -protection to Directors.
These measures may (our emphasis added) assist company Directors in making business decisions to continue trading – and potentially incurring creditor liabilities – without the imminent threat of personal liability in respect of the wrongful trading rules, should a company become insolvent and fall into a formal insolvency process.
What are the Likely Consequences of the Suspension?
In our view, the changes will affect very little. Further details are awaited on this, but the measures being implemented will form part of a new regime that looks to assist struggling businesses through a difficult period. The Government’s stated objective remains to assist businesses and ensuring they are provided with the necessary time and space to ride out the wave that is the COVID-19 Pandemic.
The Business Secretary has reiterated that ‘all of the other checks and balances that help directors fulfil their duties properly will remain in force’. This is of course subject to change.
What Can and Should the Well-Advised Director Do?
On first read, such changes appear to provide welcome news to many Directors whose companies are suffering right now. However, it is important that Directors do not become complacent bearing in mind the plethora of other statutory obligations that they are subject to, with the obligations they are still under. The priority should remain the mitigation of risk of breaching any obligation and obtaining restructuring advice now, during the storm.
Directors should continue to have in mind, in particular, the following areas of risk:
- Director Disqualification (‘DD’) under the Company Directors Disqualification Act 1986 (‘CDDA’). If post liquidation, the Director is deemed to have engaged in Unfit Conduct, which is very widely interpreted, the Director is likely to face an expensive and time consuming DD investigation by the Insolvency Service. Examples of Unfit Conduct include:
- Non-payment of Crown debt.
- Trading the company for too long.
- Not keeping or delivering up the company books or records.
- Misfeasance claims against them and their assets personally, by Liquidators, alleging the mis-application or misuse of company money or assets, under section 212 of the Insolvency Act 1986.
Advice from our Insolvency Solicitors
Here at NDP, our 9 Insolvency Law Solicitors and the Team behind them are well placed to advise our clients and contacts, free of charge in the first instance.
Licensed Insolvency Practitioner (‘LIP’) Advice
Due to our extensive LIP contacts, we can arrange immediate consultations for you and your clients, with the right LIP for your business, usually on a free of charge basis in the first instance. Choosing the ‘right’ LIP for you and your business, is critically important.
Why Bother Getting that Legal or ‘LIP’ Advice?
Apart from the obvious benefit of talking to experienced professionals, taking advice now can be a useful ‘insurance policy’ for the Director, if he/she follows the advice given, but is then subsequently challenged by a LIP. What’s to lose? There is much to gain in taking that advice at an early stage.
Free Initial Advice from our Insolvency Solicitors
If you are a Director reading this and are concerned about your business or any future liability, or would like to discuss anything that is on your mind then please do not hesitate to contact a member of the Team. Click here to see our full list of contact numbers during the current Covid-19 lockdown.
We have significant experience in advising and defending directors facing Director Disqualification and/or misfeasance claims. Please click here to see some of our testimonials.