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Richard Ludlow

Partner - Sevenoaks & Ashford

New insolvency regulation to protect directors during Covid-19

Existing Wrongful Trading provisions

Before the announcement by the Business Secretary on Saturday 28 March 2020 the implication of the wrongful trading provisions were set out within Section 214 of the Insolvency Act 1986.

These provisions confirm that where a director allows or causes a company to continue trading where the director knew (or ought to have known) that it was unlikely to be able to avoid the company from going into liquidation, they may become liable to pay those losses, that it can be shown, occurred from the date when such knowledge could have existed.

The evidence showing when the director knew, or should have known, about such risks is usually a very contentious issue. To satisfy the claim the parties will need to rely on evidence from the immediate persons involved as well as various third parties which will, inevitably lead to increased legal costs which will, in turn, only add to the potential liability against you as the director. A claim, with interest and legal costs, bought under this heading – “wrongful trading” – could end up being for a substantial amount of money which, you, as the director will be personally liable for.

Government to protect businesses from insolvency

However, in the current period of uncertainty and, in a time of multiple unknowns for businesses, the government has now stepped in – following a number of days of speculation – to announce a number of new measures to prevent businesses, who are unable to meet debts as a result of the impact of coronavirus, from having no choice but to look to insolvency.

The Government’s Business Secretary – Alok Sharma – in an announcement on Saturday 28 March said ,

“the wrongful trading law would be suspended to protect directors during the pandemic. The move will allow directors of companies to pay staff and suppliers even if there are fears the company could become insolvent…..the move would allow companies to “emerge intact the other side of the Covid-19 pandemic”.

This announcement will see rules temporarily suspending the wrongful trading provisions – for company directors – for a period of 3 months beginning from the beginning of March 2020. It effectively removes the threat of personal liability for business debts.

It is hoped that it will give directors the comfort that they can do their utmost to continue trading their business – in these difficult times – without the threat of personal liability if the company, despite their best efforts, fail.

Jonathan Geldart, of the Institute of Directors stated that,

“Our overriding objective is to help UK companies which need to undergo a financial rescue or restructuring process to keep trading,”

It was confirmed that the legislation, which will apply retrospectively from the beginning of March was currently being prepared and would be introduced.

Impact of new insolvency regulation

These changes, which will need to be considered in detail when they are produced, could lead to an ability for companies to continue trading for a lot longer, potentially without the risk for their directors, than would have been the case under the current wrongful trading provisions which were originally introduced by the Insolvency Act 1986.

Contact us

For advice in respect of company insolvency, restructuring, director duties and the obligations and responsibilities for directors when facing financial difficulties as well as specific advice in relation to wrongful trading and how it can impact on you personally then contact Richard Ludlow e. richardludlow@rix@kay.co.uk ; t. 01732 441695

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