Directors beware – end of suspension of wrongful trading

As has been widely reported, the Government has announced amendments to and the extension of certain provisions of the Coronavirus Insolvency and Governance Act 2020 which came into force in May this year. Whilst some provisions, such as the prevention of creditors issuing winding up petitions, unless the debt has not arisen as a result of Covid 19, will continue until 31 December 2020 (if not longer), there has not been an extension to the suspension of the wrongful trading provisions. With effect from 1 October 2020 the suspension of wrongful trading will end and company directors will once again be at personal risk for a claim for wrongful trading if they allow a company to continue past the point that there was no longer a reasonable prospect of avoiding insolvent liquidation.

Given the risk of further lockdowns and the growing number of restrictions being imposed by the Government, directors of companies in sectors affected by Covid 19 (or who were in difficulty prior to the pandemic) will find it difficult to have certainty that their company can continue to trade without falling foul of the wrongful trading legislation without taking care and the appropriate professional advice.

What is Wrongful Trading

When a company is experiencing financial difficulties its directors face a difficult balancing act of managing the company’s business and stakeholder expectations whilst also considering their own personal liabilities.

If a company is insolvent or on the verge of insolvency, it is essential that directors are aware of the duties they owe to creditors as in certain circumstances the directors can be personally liable if the company goes into insolvent liquidation and they have failed to carry out their duties with the appropriate level of skill and care. Directors should ensure that they know what their duties are and that they act correctly to minimise any such risk.

When a company is solvent the duties of the directors are to act in the best interests of the company and its shareholders. Where a company is insolvent or facing insolvency the directors’ duties switch to ensure that the company acts in the best interests of its creditors whose interests must be put before those of the shareholders. These duties will remain in place regardless of the temporary relaxation of the wrongful trading regime.

Directors can be personally liable for wrongful trading if, during the period they are a director, the company continues to trade when the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. If found guilty of wrongful trading a director can be ordered by the court to pay to the company an amount equal to the losses it has suffered as a result of the continued trading.

Liability for wrongful trading can be avoided if the director can show that he took every step that he ought to have taken with a view to minimising the potential loss to the company’s creditors.

Other Duties/Potential Labilities

It is important to remember that wrongful trading is part of a wider regime and that there have been no changes announced to the law relating to misfeasance, directors fiduciary duties or fraudulent trading. Therefore, the other checks and balances that exist to ensure that directors continue to fulfil their legal obligations remain in place.

Directors must seek professional advice at the earliest opportunity if they believe that the company may be getting into financial difficulty. Timing is crucial as the directors will be judged on when they knew or ought to have known that there was no longer a reasonable prospect of avoiding an insolvent liquidation.  They will also be judged on the actions they take or ought to have taken to minimise the loss to the company’s creditors.

Practical Considerations

Directors should ensure that they:

• Have considered and understood the Government backed aid that is available such as the Coronavirus Job Support Scheme, the Coronavirus Interruption Loan Scheme available to SMEs and the Covid Corporate Financing Facility for larger companies;
• Have reviewed key contracts (do they include force majeure clauses);
• Maintain ongoing dialogue with key suppliers/stakeholders;
• Carry out forecasting building in periods of disruption/closure of periods of varying length;
• Seek specialist advice, where appropriate, on contingency options.

Legal Considerations

To protect themselves the directors should:

• Take professional advice at the earliest opportunity and ensure that such advice is both documented and followed;
• Ensure that the most accurate and up to date financial information on the company’s affairs is available so that the directors can evaluate the trading and financial position of the company and the viability of its business;
• Hold regular board meetings and keep detailed minutes of the strategy being followed by the board and the steps they are taking to minimise potential losses to creditors;
• Keep in regular contact with the company’s bankers to ensure that facilities are sufficient to meet the company’s cash flow requirements and inform major creditors of the financial condition of the company and where appropriate seek their support for the continued operation of the company.

We have almost 20 years of experience of advising on corporate governance and on wrongful trading. For further information or to find out how we can assist you, please contact Barry Niven on 0118 9523569 or at barryniven@cliftoningram.co.uk or Joel Molloy on 0118 9120229 or at joelmolloy@cliftoningram.co.uk.

This article is written as a general guide and believed correct at the date of publication. If you need further or more specific information relating to your situation, please get in touch with us.