The Government has announced changes to wrongful trading legislation, effectively removing liability for company directors during COVID-19
In normal circumstances, directors of a company facing financial difficulty need to be mindful of the risk of wrongful trading and its consequences.
The concept of wrongful trading creates a liability for the directors of a company if, prior to entering a formal insolvency procedure, they knew, or ought to have known, that there was no reasonable prospect of recovery for the company and yet despite this, the directors continued trading.
Under the Insolvency Act 1986, if a director is found to be liable for wrongful trading, the Court is able to order that the director make a contribution to the insolvent company's assets.
We are not, however, currently living under normal circumstances and in light of the ongoing uncertainty in relation to the public and global health crisis created by COVID-19 the Government has opted to suspend liability for wrongful trading until further notice. This change, when it eventually comes into force, will also have retrospective effect back to 1 March 2020.
Like many of the new provisions in response to COVID-19, the Government has yet to implement the actual legislation, therefore until such legislation is available even in draft it is unclear precisely how this new law will be implemented or for how long.
This provision is intended to be introduced in tandem with other measures to lessen the strain on businesses throughout the public health crisis. For example, the deadline for the submission of accounts to Companies House has been extended by three months with additional extensions available if necessary on request, "favourable" loans are being made available to businesses, and the ability to furlough employees is now in place to help avoid mass redundancies.
Further legislation is to be expected going forward to lower regulatory requirements in the near future. Although it is impossible to speculate how long they will go on for, or when they will be brought to a close, it would appear that these provisions are only intended to last for the duration of the health crisis.
Ultimately it is clear that the Government is trying to ease the strain on businesses as the health crisis progresses. Unfortunately, it will be impossible to discern whether or not they were successful until after the fact.
If you or your business are suffering financially then please do not hesitate to get in touch for advice.