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Covid-19: A must read for limited company directors!

7th May 2020

Covid-19: A must read for limited company directors!

Time is running out for director's waiver on wrongful trading

Context

One of the government's recent proposals to help struggling businesses is the suspension of wrongful trading legislation for three months.

In the absence of any extension to these provisions, directors who have benefited from the change in the law will need to consider how best to protect themselves when it expires at the end of May.

What you need to know

What is wrongful trading?

The wrongful trading provisions in the Insolvency Act impose personal liability on company directors in respect of the debts of the company if:

  • directors carry on trading once they should have realised that failure was inevitable
  • creditors lose out as result of this decision

Accordingly, if a company runs a business that is unable to trade for the foreseeable future, as result of the lockdown, then the directors should consider whether or not liquidation is inevitable and how they can best take steps to minimise losses to their creditors.

Effect of suspending the wrongful trading legislation

The aim behind the freezing of the legislation is to prevent directors from putting their companies into liquidation.  By keeping them mothballed for three months and taking advantage of the loans and tax breaks available to them the hope is that directors will keep their businesses going so that they can carry on trading after the lockdown has ended and resuming payment of rates, tax and other outgoings.

What you need to do

As a director, in light of the help available, you should make a full assessment of the liability of your businesses and, in particular, review whether you can continue in business.

If you consider that there is a viable future for the company then you should document your reasons and retain copies of cash flow and other forecasts justifying this decision.  This will be of use if the company should ultimately fail, as a liquidator will be asking why you continued to trade. 

If your projections were to turn out to be false, as long as you can show that your projections were reasonable, based on what was known at the time, you are unlikely to be criticised by a subsequent liquidator. 

If, having prepared the appropriate forecasts, you conclude that there is no viable business after 31 May, you should obtain professional advice on your position before the rules change. 

Finally, food for thought

It is worth remembering that the government has not yet published the legislation that will suspend wrongful trading.  Much remains to be seen, including whether it is just company directors who will benefit from the change in the law or whether it will also apply to members in respect of limited liability partnerships.  Furthermore, to what extent the legislation will release liability in respect of other provisions of the Insolvency Act or the Companies Act relating to directors' duties generally is unknown.  The business secretary's statement, that all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force, suggests that any wrongdoing by the directors during the moratorium or any wrongful trading that took place before 1 March will still attract the attention of any subsequent insolvency practitioner.

To discuss any aspect of director's wrongful trading, or wider insolvency matters, please contact our Head of Insolvency and Business Recovery David Ellis, who is also a licenced Insolvency Practitioner.  Contact David on 07515 999503 or email david.ellis@higgsandsons.co.uk

If you have any other general queries or concerns that you feel we can assist with, please email supportingyou@higgsandsons.co.uk and somebody will get back to you as a matter of urgency.

 

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