Temporary Suspension of Wrongful Trading Provisions

Our Insolvency Practitioners Comment

On Saturday 28th March, the UK Business Secretary, Alok Sharma announced new insolvency measures to protect businesses suffering from the Coronavirus pandemic. One of the measures is the temporary suspension of wrongful trading provisions, which will be introduced retrospectively from 1st March 2020 for three months. This is intended to help company directors keep their businesses going without the threat of personal liability.

In an earlier article we stated that as much as possible needs to be done to prevent as many companies as possible from entering insolvency, and this announcement by the government is most welcome. In this article we summarise what the suspension of wrongful trading provisions means and how it can benefit companies, whilst adding a note of caution for directors to continue fulfilling their statutory duties elsewhere.

What is Wrongful Trading? Why Will its Temporary Suspension Help?

As set out in section 214 of the Insolvency Act, 1986, wrongful trading occurs when companies continue to carry on trading when they are insolvent – defined as being unable to pay their debts when they fall due. The Insolvency Act made it an offence for a company director to continue to trade if they are aware that their business is unavoidably heading towards liquidation

As a result of Coronavirus many thousands of businesses, through no fault of their own, started experiencing significant financial difficulties – in some cases almost overnight. The suspension of wrongful trading means, therefore, that companies can continue to trade and pay their staff and suppliers even if there are concerns that insolvency is looming, giving them breathing space to avoid insolvency.

The Business Secretary’s words were that the suspension of wrongful trading would allow companies to:

“emerge intact the other side of the Covid-19 pandemic”.

The CBI’s chief UK policy director, Matthew Fell, said of the move:

“The temporary suspension of wrongful trading provisions, along with other measures, will give much needed headroom for company directors to enable otherwise viable businesses to use the government’s support package and weather this crisis.”

Comment From our Insolvency Practitioners

Hugh Jessesman, a partner at Antony Batty and Company and a Licensed Insolvency Practitioner commented that this move by the Government was a “welcome and necessary response on the wrongful trading side of things.”

Hugh also points out that if a Company has been trading wrongfully  before 1st March then this new announcement won’t help directors in this position at all, as it only applies during this Covid-19 abeyance period.

In addition, it is important to remember that all the other regulations that exist to ensure directors fulfil their duties remain in place. This means that the threat of Director Disqualification and Misfeasance Claims for not fulfilling statutory duties remain in force.

For help and advice in all areas of insolvency, please contact us to talk to one of the team for a free initial chat.