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Relaxation of Wrongful Trading Provisions

Relaxation of Wrongful Trading Provisions

What is it?

Retrospectively, from 1st March 2020, the government has suspended the wrongful trading provisions of the Insolvency Act 1986 for 3 months. The intention is to allow directors the breathing space to continue to trade without the threat of being personally penalised for continuing to “trade” during this period.

Context: Wrongful trading is a provision of the 1986 Insolvency Act that gives the courts power to declare that a company director is liable to contribute financially to a company’s creditors if the company has:

  1. Gone into liquidation or administration; and
  2. Where at some point before that, they ought to have realised there was no reasonablen prospect of avoiding insolvency.

Who is it for?

Directors of UK Companies and members of LLPs

Why have the Government done this?

Relaxing the Wrongful Trading provisions is a rather symbolic gesture given the small number of wrongful trading cases which are brought every year. However, the comfort it will bring to directors could be significant and when aligned with the other schemes unveiled could assist in preserving sound companies.

How is Wrongful Trading usually enforced?

In a wrongful trading case, the courts will calculate the increase in the company’s deficiency from the date the company ought to have ceased trading to the date it actually ceased trading. It is, by its very nature, a very subjective test.

There is a statutory defence which is that the director(s) took every reasonable step with a view to minimising the potential losses for the creditors.

Example:

If Mr B is trading ABC3456 Ltd which has a total deficiency as at the date of liquidation of £1,000,000 but the court determines that the deficiency as at the date Mr B ought to have decided to cease trading was £400,000 then Mr B would likely be liable for the £600,000 increase between the two dates.

What should I do next?

Even though Wrongful Trading provisions have been temporarily suspended, we would encourage clients to ensure that they:

  • Keep a record of any key decisions taken
  • Monitor cash flow and maintain regular management accounts
  • Engage with an accountant
  • Open dialogue with any secured creditors, the bank, HMRC and any significant creditors where appropriate
  • Review, amend and adapt a business plan
  • Speak to an Insolvency Practitioner
  • Consider whether continuing to trade is deferring the inevitable; the suspension has been designed to protect businesses from the current pandemic, it has not been designed to facilitate the trading of fundamentally insolvent businesses

Published 21 April 2020
Last Updated 21 April 2020

21 April 2020
First Published.

Find out more about Lawrence King

Lawrence King

Lawrence King

Lawrence is Head of Business Recovery and Insolvency.
He provides advice to creditors, directors, debtors and shareholders alike. He particularly focuses on turnaround where possible.

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