On Saturday 28 March 2020, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy, announced that the Government will make changes to the ‘insolvency process’ in England and Wales.
These include the suspension of wrongful trading provisions and the consequent potential personal liability as explained below.
Mr Sharma announced that there will be a number of updates to the insolvency regime, with a view to making the regime more flexible in the current crisis, including (but not necessarily limited to):
As ever, the devil will be in the detail. Mr Sharma’s speech was general in nature, giving no further details and legislation will need to be enacted to bring these announcements into effect.
We consider the first of the two parts of his announcement below.
By way of reminder, this provision (s.214 of the Insolvency Act 1986) allows the Court to order company directors to personally contribute towards losses suffered by creditors if it appears that the director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding an insolvent liquidation.
The ‘suspension’ of the wrongful trading provision will be applied retrospectively from 1 March 2020.
The details are yet to be finalised but this may mean that the Court cannot, during the suspension period, require a personal contribution from a director simply because that director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.
However, given that the Government has not suggested it will amend other parts of the legislation or other duties, the effect may be limited. In particular, Mr Sharma was clear in his speech that apart from the announced suspension of ‘wrongful trading’ ‘all of the other checks and balances that help to ensure that directors fulfil their duties properly will remain in force.’
Directors’ duties can be found codified in s.171-176 of the Companies Act 2006 and by way of reminder these include the duty to:
According to the Government’s announcement, all of these duties will continue to apply.
This is still a very real risk in continuing to trade if the company is insolvent given the numerous other ways in which a director might be required to personally contribute to the company’s creditors.
It will remain the case that directors will have to contribute personally if they:
If it is your view as a director that the company cannot avoid insolvent liquidation, then you should seek advice immediately.
Despite the Government’s announcement, continuing to trade in such circumstances could make the continued fulfilment of your duties as a director (particularly to act in the best interests of the creditors) very difficult, and every decision you take should be documented so that you can provide evidence of your reasoning at a later date if required.
Relevant Extract - Mr Sharma’s Speech
“We will introduce measures to improve the insolvency system, which provides the legal options for companies running into major difficulties. Our overriding objective is to help UK companies which need to undergo a financial rescue or restructuring process to keep trading.
These measures will give those firms extra time and space to ‘weather the storm’ and be ready when the crisis ends, whilst ensuring that creditors get the best return possible in the circumstances.
The changes to the insolvency regime will include new rules to make sure companies undergoing restructuring can continue to get hold of supplies and raw materials and there will be a temporary suspension of wrongful trading provisions for company directors to remove the threat of personal liability during the pandemic. This provision will have retrospective from 1st March 2020.
However, to be clear, all of the other checks and balances that help to ensure that directors fulfil their duties properly will remain in force.
We will bring forward legislation in these areas at the earliest opportunity.”
The extent of the Government’s changes to insolvency law remains to be seen. We strongly recommend that you check back for updated articles in due course.
If you are a director of a company and concerned that it cannot avoid insolvency, please call our team now and we would be happy to discuss this.
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