On 28 March 2020, the Business Secretary announced that UK insolvency laws, which deal with wrongful trading by company directors, would be temporarily suspended in light of COVID-19.
Wrongful trading is an offence under the Insolvency Act 1986, which applies to the directors (and former directors) of a company that has entered into liquidation or administration who have allowed the company to continue to trade when they knew, or ought to have been aware, that the company could not avoid insolvency. This is built on the principle that a director has a duty to take every step (which a reasonably diligent director would take) to minimise potential loss to the company’s creditors. Failure to comply with this duty could see the court ordering a director to make a compensatory payment for the benefit of creditors.
Suspension of these provisions has been welcomed by directors, as it reduces the risk of being threatened with personal liability when deciding whether to continue operating their businesses through this uncertain period.
Such relaxation applies retrospectively, from 1 March 2020 for three months, however directors should note that this relaxation of their duties will only apply to wrongful trading. The government has specifically stated that “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”.
Further guidance is expected once legislation is introduced in respect of these changes, including details on the UK Government’s ability to extend the period of suspension if necessary.