The Current Law
As the law stands, directors can be personally liable where they continue to trade a company when they know or should be aware that there is no reasonable prospect of the company avoiding insolvent liquidation at a point in the future.
If a company then later does go into an insolvency process a court can make a ruling that the directors have to personally contribute to the losses suffered by the company as a consequence of it trading in this period. This law is known as wrongful trading.
In addition, the law traditionally only provided a moratorium, protecting a company from creditor action, when a company is placed into a formal insolvency process such as a company voluntary arrangement or an administration.
Very recent legislation now gives companies some protection from Landlords evicting them from their trading premises during the current crisis (although other enforcement rights of commercial landlords currently remain in place). It would appear from the changes raised by the government recently and referred to below that protection against creditors may be extended further whilst a company continues to trade.
The Business Secretary announced on 28 March 2020 that it would be making changes to the law to temporarily suspend wrongful trading provisions which would apply retrospectively from 1 March 2020 for three months. The intention is to allow directors of UK companies to keep their businesses going without the threat of personal liability.
Further, the government also stated in the briefing on 28 March that it would make other changes to the UK insolvency law to enable UK companies undergoing a rescue or restructuring process to continue trading, giving them a breathing space that could help them avoid insolvency, including enabling companies to continue buying much needed energy, supplies, raw materials and broadband while attempting a rescue. The detail of these changes have still to be announced.
The suspension of wrongful trading laws is part of a series of temporary changes to the law announced by the government designed to help UK businesses weather the storm.
The details of the insolvency law reform have not been provided to date and are not yet in law. As such the current law as at the date of this article still stands. Additionally, the Business Secretary stressed that all other checks and balances that help to ensure directors fulfil their duties will remain in force. It would therefore appear that, even when the wrongful trading laws are suspended, a director could still have personal liability for misfeasance, where a director acts in breach of their duties as a director.
As such directors need to continue to exercise good sense and act in the best interest of creditors at this time where their company is financially distressed or potentially insolvent.
This will include taking professional advice where appropriate, protecting the company’s assets and not preferring creditors. Our Directors Duties article sets out further detail.