Suspension Of Directors` Wrongful Trading Provisions Due To Coronavirus

Directors will always be concerned about possible personal liability. The wrongful trading provisions are designed to discourage directors from continuing to struggle on when they know that their business is insolvent and that there is no way back. The test is objective and retrospective, e.g.:

Did the directors continue to trade when they knew or ought to have known that liquidation was inevitable?

If, with the benefit of hindsight, the Court considers that the directors, or one of them, ought to have formed the view that the company was unable to trade through its difficulties either one, or all of them, could become personally liable for a share of the debts of the company.

Suspension of directors’ wrongful trading provisions due to the coronavirus

The Government has been at pains to stress that it will not let viable businesses fold as a result of the coronavirus pandemic. The suspension of the wrongful trading provisions announced recently makes sense in this context as many businesses will be technically insolvent very soon, if they are not already.

The wrongful trading provisions will be suspended for all companies – not only those directly affected by the coronavirus pandemic. They will take effect immediately, and retrospectively from 1st March. The suspension will last for three months. Like much of what is happening at the moment, this is not a fixed period, and the UK Government have said that the changes may be extended if necessary.

This takes one possible route to insolvency out of the picture for the time being and might save some businesses.

There is concern in some quarters that there is now a risk that financially precarious companies might think that they have license to trade on without any consequences. However, directors must still be careful because while the wrongful trading provisions have been relaxed other possible traps remain unchanged, such as:

• Directors disqualification remains as before for behaviour which makes him/her unfit to be involved with the management of a company.
• Transactions which prejudice third parties are still intact, such as transactions which prefer one particular creditor over another, and transfers at an undervalue.
• Directors must also avoid breaching their wider fiduciary duties to creditors.

These potential actions can still be pursued and it seems likely that more transactions will be scrutinised by liquidators in the future to ensure that advantage has not been taken of the current coronavirus changes.

However, and for the time being, the suspension of the wrongful trading provisions will take one particular pressure away from directors in these difficult times.