Suspension of wrongful trading

Published on
2 min read

As part of the efforts to protect businesses in the light of the current coronavirus crisis, the government has announced a series of proposed changes to the corporate insolvency framework.

The one change which has attracted the most attention is the decision to suspend the wrongful trading provisions.  Under s. 214 Insolvency Act 1986, a director may be liable to contribute to the assets of the company if at some point before the commencement of the winding up, he knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation. 

This provision most often encourages directors to seek advice from an insolvency professional and a number of commentators and bodies (including R3 which represents the insolvency and restructuring profession) have already raised some concerns about suspending provisions designed to protect creditors at a time when the company is most in financial distress.

Does this change mean directors should act differently?  Almost certainly not.

According to the statement released, “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”. In order words, nothing in these reforms will water down the basic duties owed by a director to ensure they must have regard to the interest of suppliers and creditors at a time where the company is or may become insolvent – and at no point is it more critical to consider these duties than during this crisis.

Failing to act in the best interest of all creditors might strictly fall outside the wrongful trading provisions, but it won’t prevent a director becoming personally liable for breach of duty if they fail to take prudent measures to protect the interests of creditors, including having a reasonable belief that the company can avoid an insolvency process.

Despite this announcement, our advice to directors of companies in financial distress is that you must continue to act in the best interests of all creditors and have a reasonable belief that the company can avoid an insolvency process or risk personal liability.

There is more information on the issues directors of companies facing financial distress should consider.

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