Wrongful trading rules suspension: be careful what you wish for!

Due to the material impact of the Coronavirus outbreak on UK business, the Government announced on 28 March amendments to existing statutory insolvency measures. This is in order to assist directors of businesses potentially unable to meet their debts in the current climate.

Suspension of ‘wrongful trading’ rules

The way this will be dealt with is by a total suspension of the ‘Wrongful Trading‘ rules set out in the Insolvency Act 1986. The Secretary of State for Business, Mr Alok Sharma, announced that the Wrongful Trading rules would be suspended to protect directors during the Coronavirus crisis. The detail of this has not yet been published. However, the move is intended to free up directors of companies in order to continue to pay employees and suppliers even when there may be genuine fears the company could become insolvent.

How can businesses continue to trade to keep UK industry moving?

The Government has said that the move would allow companies to “emerge intact the other side of the Covid-19 pandemic”. Changes will include a temporary moratorium for businesses undergoing any prescribed restructuring. During such a time they will not be able to be put into administration by creditors. They will have freedom to continue to trade and therefore pay employees and suppliers keeping UK industry moving.

The steps have been welcomed by the Institute of Directors and other relevant bodies. The overall aim of the Government policy is to help UK companies, which need to undergo a financial rescue or restructuring process, to keep trading. The idea being that the relaxation of rules will give firms extra time and space to weather the virus storm and be in better shape when the crisis ends. Again, the detail is still to be published. The Business Secretary has said that legislation would retrospectively apply from the beginning of March 2020 and would be introduced at the “earliest opportunity”.

How do other laws in the Insolvency Act affect businesses?

However, the Business Secretary has had to concede that “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”. And here lies the major problem with the proposals. The Wrongful Trading provisions set out in the Insolvency Act 1986 forms only part of a relatively complex set of laws which protect the public and creditors from unscrupulous individual directors. There are those that argue such laws are very relevant now with UK businesses drastically taking action in order to cut costs or save reputations.

Wrongful Trading rules makes it an offence for a company director to continue to trade if that person knows that the business is unable to avoid going into insolvent liquidation. However many other legal prohibitions can apply to the same series of potential decisions by directors and not just Wrongful Trading. This would include civil action against directors for breach of fiduciary duties and which would hit their own bank balance if successful. During the current crisis, directors are certainly facing immense challenges. However directors can still be held accountable from other laws not just Wrongful Trading. If they are, for example, motivated only by their own selfish motives there can potentially be other statutory and common law provisions to call them to account.

Avoiding unexpected legal claims to your business

At times like this directors of businesses must assess what action they take very carefully and with proper advice. Taking action just because you think that a particular statutory offence will not apply could led to unexpected legal claims against directors. It may well sound like every director’s dream when making decisions but it could be a case of Be Careful What You Wish For….

The Corporate and Commercial department at Barlow Robbins LLP is ready to help and give advice directors and senior managers in this crisis.