Wrongful Trading Relief Announced by the UK Government – is it all it’s cracked up to be?

As the UK Government gave its daily briefing just after 5pm on Saturday 28 March 2020, company directors who were already incredibly nervous look like they have just been given a lifeline at the potential expense of creditors.

Firstly, what is Wrongful Trading?

To try and keep this brief, it is where a director trades past the point of insolvency, doesn’t take every possible step to minimise the losses to creditors and the position gets worse. As a result, if the company then falls into liquidation or administration a director can be personally liable.

Therefore the announcement that Section 214 of the Insolvency Act 1986 will be relaxed will be seen as great news for directors and bad news for creditors. But will it?

As with all of these emergency measures, the detail is days away, but Wrongful Trading is only one of a number of consequences for a director running a business when it is in dire financial difficulty, and there have been no announcements about the other provisions.

Is this deliberate or was it an accident? Who knows.

Will it be a get out of jail free card for any and every director to act with scant disregard for the consequences because there won’t be any from a Wrongful Trading perspective?

Again, ignoring the detail, it cannot be a public policy position that directors of failing businesses that should have closed before the lockdown and were already well within the remit of trading whilst insolvent (another name for Wrongful Trading), will be allowed to carry on regardless and be excused for their actions.

It must be the case that where directors act reasonably, in all the circumstances, take advice and act as they should do, but then don’t emerge the other side or do but fail within the coming 6 (?) months that there will be no prospect of the Liquidator/Administrator issuing a Wrongful Trading claim. But if that was the case, how do you distinguish between the ones where you can/should and cannot or should not?

This must be especially true when you consider the fact that by carrying on regardless there is a clear risk a director may commit fraud by claiming for Furloughed employees that were not in actual fact Furloughed. They may also run up more tax and other debt with absolutely no prospect of paying for it.

But even if they are excused from Wrongful Trading, what about the following:

  • A director who acts unreasonably or builds up debt (e.g. to HMRC) may face disqualification proceedings and be prevented from being a director for between 2 and 15 years;
  • A disqualified director can be subjected to a compensation order, forcing him/her to contribute towards the creditor or group of creditors prejudiced by the actions that led to the disqualification;
  • A director, who takes goods on credit knowing the creditor will not be paid, can be made personally liable for the debt
  • It will not excuse many of the other penalties under the Insolvency Act – Preferences and Transactions at an Undervalue to name the obvious 2; or the Companies Act – illegal dividends
  • It doesn’t stop an overdrawn loan account being incurred or being repayable;
  • Directors can be personally liable for certain tax debts and by carrying on, there is a chance this debt will only grow

I must express concern for creditors in this news, but creditors must also look to protect themselves and consider the terms on which they should be selling at this moment in time.

As for Company Directors though, this does seem to be some welcome relief to the grave anxiety most directors will have at this moment in time.

If you are worried about your position, would like to discuss a business review, feel your company may be at a tipping point, please do contact us and we will be happy to assist.

Please email us – kevin@lucasjohnson.co.uk or phil.ross@lucasjohnson.co.uk or call 0330 900 2000.

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