Suspension of Wrongful Trading During the UK Lockdown
In what may prove a much-needed and welcome relief for businesses, the UK government has introduced a temporary suspension on wrongful trading provisions for an initial period of three months (having retrospective effect from 1st March 2020). This is capable of being extended depending on the continuing impact of the COVID-19 pandemic.
This suspension of the rules is designed to assist businesses impacted by the coronavirus outbreak and to provide them with an opportunity for weathering the storm, without being unduly restricted by the risk of directors incurring personal liability.
What is wrongful trading?
Ordinarily, where a director either knew or should have known that there was no reasonable prospect of the company avoiding insolvency but failed to take necessary steps to minimise losses to creditors, they can be guilty of wrongful trading.
Both a subjective and objective test is applied in terms of what the director knew and what a competent director should have known.
Where wrongful trading is found, directors can be required to make such a contribution to the company’s assets as the court deems appropriate. This is usually linked to the net loss suffered as a result of the period of wrongful trading. Any award, therefore, is compensatory in nature to the extent that the company is worse off as a result of the continuation of trading.
Suspension of these rules
The suspension of these rules is designed to try and give directors breathing space. This is to give businesses a better chance of emerging intact when the immediate crisis is over, without directors being hampered by threats of incurring personal liability for doing all they reasonably can to save companies and jobs during this turbulent time.
The government has made no changes to the existing laws designed primarily to protect creditors, relating to fraudulent trading, transactions defrauding creditors and malfeasance.
Directors also remain under their usual statutory duties under the Companies Act 2006 to promote the success of the company and, where there is a heightened risk of insolvency, to act in the interests of creditors also.
The threat of director disqualification also remains in force as an additional deterrent against misconduct following the relaxation of the wrongful trading provisions.
Find out more
Visit Richard Nelson LLP’s commercial litigation service page to see the full extent of our offering in this area, or see our recent article on considerations for commercial contracts during the lockdown.