The Government announced on 28th March 2020 that the wrongful trading regime, that applies to insolvent companies, will be temporality relaxed with retrospective effect from 1 March 2020 for three months. Whilst this may give some comfort to company directors during this unprecedented period, no legislation has yet been created to clarify how this relaxation will be applied and director’s duties and certain offences remain in place. Clifton Ingram’s insolvency team recommend, at this stage, that directors facing financial difficulties continue to trade with extreme caution and that they seek professional advice at the earliest opportunity if they have any doubt whatsoever on the ability of their business to continue trading and to meet their liabilities.
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.
Directors should ensure that they:
To protect themselves the directors should:
In his announcement, the Business Secretary Mr Sharma cautioned that “all other checks and balances that help to ensure that directors fulfil their duties properly will remain in force”.
Whilst the political mood is to try and give comfort to directors by relaxing the existing wrongful trading regime, directors still need to be mindful of and to comply with their statutory duties. Directors of companies experiencing financial difficulty often ignore or take too long to see the warning signs. Taking professional advice at the earliest opportunity not only protects the directors from potential personal liability, it also increases the options available for the rescue or turnaround of the company.