Julie Killip Partner
Some Pre-Christmas cheer for Directors - Wrongful Trading Liability Suspended Again
In the face of the dire economic consequences of the second national lockdown and the continuing measures to save lives, the government has reinstated the suspension of liability for wrongful trading, which lapsed on 30 September (Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349)). This second suspension of wrongful trading liability will protect directors from 26 November through to 30 April 2021.
This is a welcome change which will give directors greater confidence to continue to trade without the threat of wrongful trading liability should their company ultimately fall into an insolvency process. The change aligns with the various additional measures that the government has taken over the autumn to support business, including extending lending programmes, tax deferral schemes, the job retention scheme and the provision of various grant schemes. It remains to be seen whether the government will also extend the temporary protections to commercial tenants from their landlords and the general restrictions on the use of winding up petitions; both of these measures are currently due to expire at the end of this year.
Wrongful trading liability arises under sections 214 and 246ZB of the Insolvency Act 1986 when directors continue to trade when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and they did not take every step to minimise losses to creditors. If proven, this gives rise to personal liability for the directors to make good the increased deficiency in assets available to creditors as a result of trading beyond the point they should have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration (please see here for further details on wrongful trading liability). However, this second suspension of wrongful trading liability does not have retrospective effect from the expiry of the first period. This does leave the odd outcome of directors being exposed to wrongful trading liability for the interim period between 1 October and 25 November.
Although wrongful trading is one of the key considerations for directors of insolvent companies, in practice, successful claims against directors have been few and far between. Directors of insolvent companies still have a difficult path to navigate as they remain subject to disqualification proceedings and a range of personal liabilities resulting from misfeasance, breach of duty to creditors, fraudulent trading, and transactions which are either preferential to certain creditors or at an undervalue (please see here for further details on these liabilities). As such, the suspension of wrongful trading liability does not represent a carte blanche, and directors of insolvent companies still need to carefully consider and document their reasoning for continuing to trade, making any preferential payments and implementing material corporate actions. Directors should also ensure that they have professional advice for these difficult decisions, which will help mitigate the risks of personal liability and ensure that the directors are aware of the full range of their duties and options. Engaging professional advisers early is generally crucial in order to preserve optionality and increase the potential to find a suitable restructuring solution which maximises value for all stakeholders.