Personal liability risk reactivated for struggling businesses - comment

The reactivation of wrongful trading rules last month marks the return of personal liability risk for directors of businesses that continue to trade while on the brink of insolvency.

Monday, 5th October 2020, 7:40 am
McCann suggests taking advice from a restructuring specialist as soon as concerns arise. Picture: contributed.
McCann suggests taking advice from a restructuring specialist as soon as concerns arise. Picture: contributed.

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 came into force on 30 September, extending several “breathing space” measures for businesses hit by the impact of Covid-19.

Notably, though, it didn’t extend protection to directors for the offence of wrongful trading, which the UK government had previously suspended. At the time, this was seen as a lifeline to those attempting rescues or restructurings.

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Now that measure has ended – and there could be personal consequences for directors who breach the rules. Wrongful trading is an offence under the Insolvency Act 1986. It applies to current and former directors of companies that have gone into liquidation or administration, who allowed the business to continue trading when they knew, or ought to have been aware, that liquidation or administration was inevitable.

If wrongful trading occurs, the director(s) who caused the company to continue to trade can be held personally liable for the losses sustained. The court decides what sum, if any, they have to pay to the company – out of their own assets – by way of contribution.

The central idea behind the remedy is to put the company back into the position it would have been in had the wrongful trading not occurred. Earlier this year, the suspension of wrongful trading was heralded by some as key to business recovery, giving directors confidence to keep trading during the pandemic without the threat of personal liability.

The decision not to extend this protection has therefore attracted criticism, with concerns that it “risks opening the door to a wave of avoidable insolvencies”. But a balance has to be struck. Support can be given for business recovery that does not come at the expense of a firm’s creditors.

Notably, the suspension of wrongful trading did not impact any other offences under the Insolvency Act that can hold directors personally liable for their actions, for example. Wrongful trading coming back into force is a cue for directors to remember their duties and obligations. If there are solvency concerns, creditors and their interests should be at the forefront of a director’s mind when making decisions.

Keeping contemporaneous records can be significant if actions are reviewed later, while taking advice from a restructuring specialist as soon as concerns arise is among evidence that appropriate and responsible steps have been taken to minimise creditors’ losses.

Lucy McCann is a restructuring and insolvency partner at Brodies LLP

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