Some comfort for directors with the reintroduced suspension of wrongful trading

The UK Government has reintroduced the temporary suspension of wrongful trading measures from 26 November 2020 until 30 April 2021 pursuant to The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations. The suspension was originally introduced in March 2020 under section 12 of the Corporate Insolvency and Governance Act 2020 and expired on 30 September 2020.

Across all sectors companies face a myriad of issues such as significant VAT and rent arrears, impossibility of accurate financial forecasting, concerns with regards to potential breaches of financial covenant, not to mention the increasing difficulty in obtaining additional funding.

Whilst directors can take some comfort from the reintroduced suspension of wrongful trading, as this removes one threat of personal liability they face, the actions of directors could still be subject to scrutiny if an insolvency proceeding is later commenced. So directors must continue to adhere to their other statutory duties whilst continuing to trade their business.

To the extent a board is demonstrably reckless in their behaviour, such as incurring debts in full knowledge they are about to run out of money with no route through to solvency, it is possible they will still face consequences under fraudulent trading provisions and/or for breaching their statutory duties. It is important to highlight that the fraudulent trading and directors disqualification regimes have not been suspended and for directors who have breached their duties the misfeasance provisions in the Insolvency Act could apply to them.

It is also worth noting that the reintroduced suspension of wrongful trading is not retrospective and therefore directors could be responsible for any worsening of financial condition between the end of the first suspension on 30 September and the 26 November when the second suspension started.

In the event you are concerned about your company’s solvency, below are a few practical steps that you should take to mitigate the risks you face as a director:

• Hold regular board meetings and consider whether it is still appropriate for your company to continue trade in light of the financial resources available to it and the prognosis for the future. Minute the consideration by the board of all such information in light of their duties.
• Ensure the board is maintaining a detailed financial forecast outlining any potential liquidity issues and have regular discussions with your creditors if you are concerned with any repayment obligations.
• If insolvency becomes a real prospect for your company, ensure you carry out contingency planning with the assistance of a licenced insolvency practitioner to prepare for this eventuality.

As it stands, the suspension of the wrongful trading provisions will end on 30 April 2021 and boards will need to be fully alive and prepared for this if they think they may be wrongfully trading at this point.

For more details on the terms of the reintroduced temporary suspension of wrongful trading, please see our article on the initial suspension as the new suspension is in identical terms (other than the dates and lack of retrospective effect).