The wrongful trading provisions under the Insolvency Act 1986 provide that a director of a company which goes into insolvent liquidation or insolvent administration may be ordered by the court to make a contribution to the company’s assets if, at some time before the commencement of the administration or winding up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration and then failed to take every step with a view to minimising the potential loss to creditors as he ought to have taken.
The Regulations provide that in determining the contribution to a company’s assets that a director who has wrongfully traded should make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the period from 26 November 2020 to 30 April 2021.
The Regulations have the same impact as the suspension of liability for wrongful trading that was brought into force under the Corporate Insolvency and Governance Act 2020 (the “Act”) on 26 June 2020 and which suspended liability for wrongful trading for the period from 1 March to 30 September 2020. While a number of other temporary relief measures introduced by the Act were extended to 31 December 2020, the original suspension of liability for wrongful training expired on 30 September 2020. The Regulations introduce an entirely new second suspension period, this time between 26 November 2020 and 30 April 2021. The gap between the two separate suspension periods is surprising. It would have been possible to extend the suspension at the same time as the other temporary measures under the Act. Equally, it would have been possible to make the suspension retrospective. As things stand, courts in the future will have to deal with a patchwork of periods when considering what contribution a director found liable for wrongful trading should be required to make to the assets of the company.
Nonetheless, the Regulations should provide some welcome relief to UK businesses (although it is worth remembering that the Regulations do not relieve directors’ duties under the Companies Act 2006, which includes the duty to act in the best interests of the company). As explained in the explanatory memorandum accompanying the Regulations, “…The economic effects of the various coronavirus-related restrictions are unprecedented; faced with that level of economic uncertainty directors may choose to terminate companies which would in fact have been viable, rather than face the prospect of personal liability under the wrongful trading provisions…The suspension…is intended to allow directors of companies which are viable but for the effect of coronavirus to make decisions as to whether to continue trading without the threat of personal liability were those companies to subsequently enter insolvency proceedings”.
Authored by James Maltby, Margaret Kemp and Julia Cripps.
