Insolvency: Wrongful trading rules to be relaxed

Insolvency rules to be relaxed to protect businesses.

In an effort to help as many companies “emerge intact the other side of the Covid-19 pandemic” the UK government has announced new insolvency plans (back dated to the 1st March 2020) to prevent businesses (that are unable to meet debts due to the impact of coronavirus) from being forced to file for bankruptcy.

Alok Sharma, the UK business secretary, said the wrongful trading law would be suspended in order to protect directors during the COVID-19 outbreak.

‘Wrongful trading’ refers to situations where directors fail to take proper steps to protect creditors when insolvent administration or liquidation of the business is unavoidable.

Wrongful trading provisions apply to any person who is or has been a director of the company in question.

If the company is insolvent, any such director will be guilty of wrongful trading if the person both:

  • Knew or ought to have concluded prior to the commencement of proceedings that there was no reasonable prospect of the company avoiding an insolvent administration or insolvent liquidation
  • Failed to take every step with a view to minimising the potential loss to the company’s creditors as the director should have done

This update comes with a word of warning as MP, Sharma also advises “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”.

Breach of duties to creditors can attract personal liability, disqualification and requirements for the directors to make good improper transfers of assets.

These duties will remain in place regardless of the temporary relaxation of the wrongful trading rules. The ability to say whether a company is insolvent remains crucial, especially as commercial decisions in the interests of creditors could be substantially different to decisions taken to the benefit of members.

If you require advice about pre-insolvency action, wrongful trading and defending preferential payment claims, please contact Chris Else chris.else@elselaw.co.uk or Andy Rudkin andy.rudkin@elselaw.co.uk or alternatively you can call the main office (calls are being diverted accordingly) on 01283 526 200.

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