UK Government introduces “suspension” of wrongful trading provisions
In March 2020, Business Secretary Alok Sharma announced that provisions on wrongful trading would be suspended. The move came as part of a wider package of measures that sought to provide assistance to businesses – and their beleaguered boards – experiencing financial distress due to Covid-19.
Now set out in the Corporate Insolvency and Governance Act 2020 (CIGA), which was passed on 26 June 2020, the provisions adapt the wrongful trading regime making directors’ liability for the “relevant period” unlikely.
Why does it matter?
Under wrongful trading provisions, directors are required to take action if they know (or should know) that their business is approaching insolvency. If the directors continue to trade the business, there is a risk that they may be held personally liable in the insolvency for debts incurred after gaining that knowledge.
As a result of the Covid-19 pandemic and the forced closure of many retail operations, a large number of businesses are under considerable financial pressure, with directors facing difficult decisions on whether to continue trading. The UK Government’s initial decision to suspend the wrongful trading provisions was to give boards breathing space to deal with the pandemic’s impact on trading without the spectre of wrongful trading and personal liability hanging over them.
Rather than amend the underlying Insolvency Act provisions, the CIGA alters how the wrongful trading regime will be applied in relation to a company’s financial position during the “relevant period” being 1 March 2020 until 30 September 2020 (unless extended further). For this period, the assumption is that any worsening in a company’s financial position was due to the effects of the Covid-19 pandemic and not the actions of its directors.
What this means in practice is that during the relevant period, directors are not hampered by the wrongful trading regime whilst focussing their efforts on mitigating the effects of Covid-19 on the business. If a business can’t be saved, it also means that, at least in relation to companies that go into insolvency shortly after the end of the relevant period, wrongful trading claims are unlikely to succeed unless it can be shown that the directors should have taken relevant steps before the start of the relevant period.
Whilst this suspension has been welcomed by the business community, the Government’s announcement also made it clear that all other ‘checks and balances’ on directors would remain in place.
Notably, directors will still be required to comply with their wider fiduciary duties and their duties under the Companies Act 2006. As a result, directors still need to proceed with particular caution when taking on additional debt or providing assurances to lenders and should consider and document creditor payments and asset disposals.
It also remains to be seen whether the secretary of state will use their powers to extend the suspension beyond the end of September. Whilst aspects of the lockdown are gradually being lifted in the UK and elsewhere, consumer behaviour will continue to be affected and many retailers, and their boards, are likely to face challenges extending beyond the relevant period.
1. If there are solvency concerns, a company’s position immediately before the beginning of the “relevant period” and at the end of it are going to be important in relation to any potential wrongful trading liability. Directors and their advisers should consider both timeframes carefully.
2. Whilst the suspension of the regime gives some comfort, don’t be lulled into a false sense of security! Directors are still subject to their other continuing duties and should take professional advice urgently on any solvency concerns.
3. Look out for further announcements. It remains to be seen whether the Government will extend this suspension beyond the end of September.