Insolvency Practitioner, Hugh Jesseman Comments
On 26th March 2021, several temporary measures to help businesses through the Covid-19 pandemic that were due to expire in March and April 2021, as part of the Corporate Insolvency and Governance Act 2020, were extended to now expire on 30th June 2021. Two of the key measures extended are: the suspension of Wrongful Trading Liability and the restrictions on presenting winding-up petitions and on winding-up orders.
Of particular interest is the extension of Wrongful Trading Liability, which is intended to help company directors affected by Covid-19 to keep their businesses going without the threat of personal liability.
This announcement by the government is most welcome. In this article we summarise what the suspension of wrongful trading liability means and how it can benefit companies, whilst adding a note of caution for directors to continue fulfilling their statutory duties elsewhere.
What is Wrongful Trading? Why Will its Temporary Suspension Help?
As set out in section 214 of the Insolvency Act, 1986, wrongful trading occurs when companies continue to carry on trading when they are insolvent – defined as being unable to pay their debts when they fall due. The Insolvency Act made it an offence for a company director to continue to trade if they are aware that their business is unavoidably heading towards liquidation.
As a result of Covid-19 many thousands of businesses, through no fault of their own, have experienced significant financial difficulties. The suspension of wrongful trading means that companies can continue to trade and pay their staff and suppliers even if there are concerns that insolvency is looming, giving them breathing space to avoid insolvency.
Comment From Insolvency Practitioner Hugh Jesseman
Hugh Jessesman, a partner at Antony Batty and Company and a Licensed Insolvency Practitioner commented that this move by the Government was a “welcome and necessary continued response on the wrongful trading side of things.”
Hugh also points out that the extension is only to 30th June and that directors of companies who believe that they might still be heading for insolvency after the extension ends should consider now the steps they should take to avoid Wrongful Trading and Personal Liability. These include:
- Proceed with caution if they notice that their company is having financial difficulties.
- Quickly raise concerns about the company’s finances with their accountants or fellow directors.
- Seek advice from a professional, such as an insolvency practitioner, as soon as possible, to limit their personal liability if insolvency does strike. This will help to prove that they were acting in the best interests of the company by seeking advice.
- Make sure that all decisions that are made throughout any period of financial difficulty are properly documented and that regular board meetings are held with issued minutes. These are always asked for in an investigation and if they are not there or properly documented, it does not look good.
In addition, it is important to remember that all the other regulations that exist to ensure directors fulfil their duties remain in place. This means that the threat of Director Disqualification and Misfeasance Claims for not fulfilling statutory duties remain in force.
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