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Wrongful trading law suspension - Coronavirus Impact

On 28 March 2020, Alok Sharma, the UK Business Secretary, announced numerous proposals for the urgent reform to UK Insolvency Law in an attempt to protect UK companies, and more specifically their directors, who are facing the additional issues due to their businesses potentially becoming insolvent as a direct result of the impacts on our economy caused by the COVID-19 crisis.

The most notable proposal made was the temporary suspension of wrongful trading provisions under the English law Insolvency Act 1986. This temporary suspension has retrospective effect and is currently proposed to be effective for the period of 3 months beginning from 1 March 2020. This suspension alleviates current company directors risks of the possibility of being personally liable for any losses suffered by creditors for failing to cease trading from the moment that the director “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration”.

Essentially, such a suspension has been introduced to allow companies to do all they can, including seeking additional funding if required, to ensure that they have the best opportunity to survive this crisis. For directors the key point to note is that this temporary suspension allows a company to pay its staff and suppliers even if there is real fear in respect of the company’s solvency at that time.

The UK Business Secretary is hoping that by suspending the need for directors to balance their duties to the company’s creditors against reviewing the solvency position of the business will result in numerous businesses, especially those who have been forced to close their doors, surviving this crisis that the UK business sector is facing.

Whilst this is obviously a very welcome development from the UK Government, it is one that we are yet to see the full details of therefore, in the meantime, directors should continue to conduct themselves in a prudent and diligent manner and continue to keep the company’s future viability under constant review as it has been confirmed that directors will still be bound by their fiduciary/statutory director duties and that there is no intention to suspend the rules on fraudulent trading.

It is possible that the introduction of this suspension will result in administrators and liquidators looking more closely at the precise time the company became insolvent and whether the directors should have ceased trading before 1 March 2020 and/or it should immediately cease trading once this suspension is lifted.  

In terms of practical advice, we would suggest that any decisions taken by the directors of a company during this difficult period of time should be carefully considered, appropriately documented and where appropriate professional advice should be taken.

The UK Government has taken steps to take the immediate pressure off many businesses which have been decimated by this crisis including support of payment of employee wages and moratoriums on Forfeiture proceedings for non-payment of rent.  Whilst this will be of assistance in the short term, only time will tell whether or not the impact of this crisis will cause irreparable damage to a business.  Directors, in accordance with their duties, must therefore continue to regularly review the financial position and outlook of the company and seek professional advice where appropriate.

We do not yet know if similar measures will be implemented here by the recently re-seated Northern Irish government but as our Insolvency laws have always been drafted very much in keeping in line with the approach taken by Westminster we would hope this will be the case. Until this is confirmed, companies in Northern Ireland can still avail of the traditional options available to them should they believe their business is insolvent or likely to become insolvent.

Should you wish to discuss any aspect of this note or the issues that your business is currently facing, please do not hesitate to contact Richard Craig or your usual Mills Selig contact.

Richard Craig

Mills Selig
21 Arthur Street
Belfast, BT1 4GA
Northern Ireland

T: +44 (0) 28 9024 3878
E: richard.craig@millsselig.com

Speak to us on +44 (0)28 9024 3878