Wrongful trading suspension does not excuse directors of their other obligations to creditor
Earlier this year the Government introduced specific new rules on the continuation of the temporary suspension of wrongful trading in the Corporate Insolvency and Governance Act.
This clarified rules that were originally introduced in March 2020 at the start of the COVID-19 outbreak in the UK. The rule change allows company directors to ensure that their businesses can continue to operate, despite the impact of COVID-19, without fear of personal liability for wrongful trading.
In effect, it offers directors a temporary ‘holiday’ from the rules in the Insolvency Act 1986 that are designed to protect creditors from rogue traders. In particular, it amends section 214 on wrongful trading, which requires company directors to assess the likely prospect of avoiding insolvency and whether they can continue trading.
Where a company cannot continue trading and there is no reasonable prospect of avoiding insolvency it is usually a director’s responsibility to cease trading. Where they continue to trade creditors could commence direct action against the director and the protection of limited liability would not apply.
The rules change this year restricts such a scenario happening, however, company directors must continue to be mindful of other considerations related to the continued trading of their business. As part of their obligations, directors must be mindful of the fact that all other sources of liability under the Insolvency Act 1986 remain unaffected, including the issuing of sanctions and fines against directors that attempt to defraud creditors or the company.
The new Act also does not affect their fiduciary duties or the fraudulent trading provisions of section 213.
Directors must also fulfil their duties under the Companies Act 2006 and be mindful of the interests of creditors if the likelihood of insolvency increases.
As such, while the temporary suspension of wrongful trading has offered welcome support, it should not change the importance that directors place on evaluating the financial position of their company or their responsibilities to creditors.
Directors will continue to be scrutinised for their actions in an insolvency scenario and so it is important that they receive the right advice and support.
If you are unsure of your responsibilities to creditors following the changes in the Corporate Insolvency and Governance Act, please contact us.