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COVID-19 – Government announced relaxation of wrongful trading rules

02 April

Due to the restrictions on movement and the general impact of the COVID-19, many companies are now finding themselves unable to pay their suppliers and other creditors meaning they are arguably insolvent (often on a cash flow basis).

In response to this, the government recently made an announcement to ease the burden of this on company directors. This has implications for both directors and creditors.

The risk of insolvency

Directors have a number of duties which include managing a company with reasonable skill and care and acting in the best interests of the company and its shareholders. When a company is insolvent, a director should act in the interests of the company’s creditors. However, the creditors run the risk of not being paid and the directors risk being liable for wrongful trading.

Wrongful trading in summary

Wrongful trading was introduced in 1986 and effectively means that it is an offence for a company director to continue trading if they know the business is unable to avoid going into liquidation. If proven, the court can make the directors personally liable and compel them to contribute to the assets of a company. However, it is a defence if the directors can show they took every step which they ought to have taken with a view to minimising losses to creditors.

Sometimes, companies can trade through difficult periods when they would technically be insolvent and ultimately get a better outcome for their creditors.  However, the threat of personal liability often drives directors to put the company into administration or liquidation.

The government announcement

In response to this, on 28 March 2020 the government announced a temporary (and retrospective) relaxation of the wrongful trading provisions. This is to run initially for 3 months from 1 March 2020. The aim is for directors to keep businesses going (paying staff and creditors) without the threat of personal liability.

We are also likely to see the fast-tracking of the 2018 planned new restructuring procedures, such as a short “moratorium” for companies in financial distress. This is a “breathing space” during which time a creditor’s action is restricted e.g. they cannot issue a winding up petition.

What action to take

If you are a director and think you may be at risk of your company becoming insolvent:

  • Seek professional advice. Due to the current industry issues, we have teamed up with Leonard Curtis Business Solutions. If you would like to be put in touch with them please see our contact details below.

As an Operator Licence holder, you must also:

  • Consider your ongoing ability to demonstrate financial standing and whether you will need to apply to the Traffic Commissioner for a Period of Grace.

If you are a creditor dealing with a business which you think may be in financial difficulties:

  • Speak to the company and try to work it out.
  • If this doesn’t work we would normally suggest considering a petition to wind up the company. However, these are currently taking much longer than the usual six to eight weeks as none are being heard at present due to COVID-19 and the relevant court being unable to conduct remote hearings.
  • We therefore recommend you seek advice from our Dispute Resolution team urgently.

Despite the relaxation of some of the insolvency rules, it is really important that directors continue to have regard to their obligations as directors and to creditors. It is not clear how relaxation will be interpreted. Furthermore, there are other insolvency provisions (such as fraudulent trading – which has criminal ramifications too) which are not being relaxed and of which you could fall foul.

Please contact our Regulatory team at regulatory@backhouses.co.uk or our Corporate team at corporate@backhouses.co.uk or on 01254 828300 for advice.

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