Business Regulation » Coronavirus: directors still need to tread carefully to avoid personal liability

Coronavirus: directors still need to tread carefully to avoid personal liability

Edward Starling, partner at Wedlake Bell discusses liability when wrongful trading rules are relaxed.

Directors are under increasing pressure to ensure their businesses survive during the challenges of the coronavirus pandemic. On March 28, the UK government announced it is advancing its plans to introduce new insolvency restructuring procedures to help businesses keep trading during the outbreak. This announcement allows responsible directors to focus on genuine attempts to save businesses, but care must still be taken to comply with their duties during these unprecedented times.

A director can be found personally liable if they continue to trade and increase the company’s losses after they knew or should have known that the business was unable to avoid going into liquidation (called wrongful trading).

Wrongful trading provisions have now been suspended for all companies for three months (which may be extended). This will protect directors during the coronavirus outbreak, allowing them to pay staff and suppliers even if there are fears that the company may not survive. The government’s aim is for companies to “emerge intact the other side of the coronavirus pandemic.” The legislation will apply retrospectively from March 1, 2020 and will be introduced as soon as possible. It also removes concerns for directors of companies incurring additional loans offered such as the Coronavirus Business Interruption Loan Scheme.

A temporary moratorium for businesses undergoing a restructuring process has also been announced. Creditors will be unable to take enforcement action during this period. This is to augment the restriction on forfeiture of lease provisions announced recently. This means firms which need to undergo a restructuring process can keep trading but is also intended to result in a better return for creditors once these difficult times are over.

A new restructuring procedure is also planned, which would have the effect of binding all creditors. This suggestion has been in the pipeline for some time but further clarification is needed on the detail.  However, it may prove a useful tool to assist struggling companies.

Concerns over abuse of the rule relaxation

There has been concern that the new changes will allow directors of financially unstable companies to bury their head in the sand or continue to bury their head in the sand if they were already in trouble. However, now more than ever, directors should remain vigilant to their duties. The relaxation of the wrongful trading rules does, in some ways, give directors some breathing space and one less thing to worry about in the short term but directors are not absolved of all of their responsibilities. In particular, companies that were financially unstable before the pandemic cannot trade with impunity – if the business could potentially not survive even before coronavirus, these changes are not necessarily going to protect directors from liability.  This falls into the category of burying your head in the sand and it is those business especially that should speak to an insolvency practitioner urgently.

You must make sure you comply with all of your other director duties as all other checks and balances will remain in force. A subsequently appointed liquidator can still bring actions against directors for misfeasance (breach of duty to the company/its creditors, negligence or misappropriation) and there are wider powers for liquidators or administrators to challenge transactions  entered into by companies at a time when it was insolvent

Was this article helpful?

Comments are closed.

Subscribe to get your daily business insights