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COVID-19 and the suspension of Wrongful Trading provisions

On 28 March 2020, the government announced that they would temporarily suspend the wrongful trading provisions for three months, with the changes applying retrospectively from 1 March 2020.

What is Wrongful Trading?

If a director (or former director) of a company knew or ought to have known before the commencement of liquidation or administration that there was no reasonable prospect that the company would avoid insolvent liquidation or insolvent administration, the liquidator or administrator can seek a declaration that the director is personally required to make a contribution towards the company’s assets.

The government announcement to suspend the wrongful trading provisions is intended to temporarily assist struggling companies and prevent directors incurring personal liabilities during COVID-19. It allows companies to keep trading by giving them extra time.

There is a risk that the suspension could be abused by dishonest directors who could intentionally continue to wrongfully trade. Legislation backing the government’s announcement is currently awaited and it is hoped that it will strike the right balance. It is also important to note that all other checks and balances to ensure directors continue to fulfil their legal duties and obligations will remain in place such as:

  • Directors disqualification provisions
  • Challenging transactions i.e. preference, transfers at an undervalue, transactions defrauding creditors
  • Breach of fiduciary duties by Directors

Directors of companies facing insolvency should make sure that they continue to act in the best interest of their creditors in order to avoid any further liability.

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