Relaxation of wrongful trading provisions - but there are risks all directors should be aware of!

In response to the COVID19 pandemic the government has been extremely busy and proactive in implementing temporary legislation and initiatives with the view of protecting businesses. Such legislation/initiatives include, but are not limited to:

· The relaxation of wrongful trading provisions

· The fast tracking of new procedures that provide a ‘moratorium’ to struggling businesses, which prevents winding up petitions being issued (amongst other actions)

· Coronavirus Job Retention Scheme

· 100% taxpayer-backed loans of up to £50,000

· Coronavirus Business Interruption Loan Scheme (CBILS)

· Various local grants

· Deferral of VAT payments

· Restriction preventing undue pressure from landlords

The above list is not exhaustive, but it demonstrates the UK government’s determination for the economy to “bounce back” from the detrimental impact of COVID19 on businesses. Many company directors, and perhaps more so their accountants and financial advisers, have been working flat out for the last few weeks attempting to utilise the full benefit of these initiatives for their clients. This is fantastic to see.

Now to address the elephant in the room – does the temporary legislation actually provides an overriding ‘comfort blanket’ to directors on their actions since the COVID19 outbreak? The answer is, of course, no – by all means businesses should be encouraged to maximise their entitlements to government backed initiatives, but the same insolvency provisions that have always applied, do still continue to apply. This is especially the case when we review how businesses have utilised any funds received, and whether a director has acted in accordance with his/her fiduciary duties.

The wrongful trading provisions is one area considered by an insolvency practitioner when any company becomes insolvent. In summary, the legislation dictates that if a director knew, or ought to have known the company was insolvent, and the company continues to incur liabilities, then the directors are opening themselves up to personal liability and may be ordered to make a contribution towards the liabilities of the insolvent company. The relaxation of the provisions does make complete sense considering many businesses have not been able to function properly over the last few weeks, and the current global uncertainty about, well, everything could be very easily used to question a prudent director’s judgment on a company’s solvency. However, directors should still err on the side of caution when making any business decisions or entering into transactions to mitigate the risk of personal exposure under other provisions.

To give some primary examples of other insolvency provisions that do still continue to apply and could also result in personal liability for a director in the event of an insolvency:

· Misfeasance – a fairly vague term, which broadly means that a director has not acted appropriate or in breach of his/her fiduciary duties

· A preference – when a company enters into a transaction or does something that has the result of putting a particular party in a better position than they would have been if that transaction or action had not occurred. This does not mean that no payments should be made at all! All it means is that all transactions should be in the ordinary course of business and one party is not preferred over another. It is also worth noting that there is a presumed ‘desire to prefer’ where that transaction involves a connected party (e.g. a director, connected company, family etc.)

· A transaction at an undervalue – This provision is widely used to consider whether a company has received fair value on the disposal of assets. Again, this should not be treated as a warning not to dispose of assets, but directors should ensure that all transactions are at arm’s length.

· Fraudulent trading – Often seen as the next step up from wrongful trading, but where there is a clear intent to defraud. The enforcement of these provisions is rarely seen.

It is also worth noting that the relaxation of the wrongful trading provisions is only in place for an initial period of 3 months from the start of March 2020.

If you are director of a company, or perhaps advising your clients who do have concerns regarding the solvency of their business and/or what transactions should or should not take place where there is uncertainty, please contact us for some FREE, no obligation advice. We are here to help.

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