Directors’ Personal Liability for Wrongful Trading – Relief during the Coronavirus Crisis
Posted on: 7 April 2020
International law firm Watson Farley Williams LLP (WFW) has issued a briefing, in which Partners Dev Desai [pictured] (Dispute Resolution) and Stephen Parker (Restructuring & Insolvency) discuss the UK Department for Business, Energy and Industrial Strategy’s plans to suspend provisions relating to wrongful trading under the UK Insolvency Act 1986. The suspension is designed to ease the pressure on directors running their businesses whilst technically insolvent by removing the spectre of personal liability. However, other penalties do remain for directors who continue to trade to the detriment of creditors.
As the UK’s economy continues to experience shocks, and companies of all sizes face increasingly intense financial pressure as a result of the coronavirus pandemic, the Department for Business, Energy and Industrial Strategy has announced plans to suspend provisions relating to wrongful trading under the UK Insolvency Act 1986 (the “Act”). The suspension is designed to ease the pressure on directors running their businesses whilst technically insolvent by removing the spectre of personal liability. However, other penalties do remain for directors who continue to trade to the detriment of creditors.
What is Wrongful Trading?
The rules relating to wrongful trading are set out in sections 214 (in relation to the winding up of a company) and 246ZB (in respect of administration of a company) of the Act. Those provisions give the court the power to make a declaration that a person who is (or has been) the director of a company in the process of winding up or administration should make a contribution to the company’s assets. In effect, wrongful trading can create personal liability for directors to make good losses sustained by creditors and, in some cases, shareholders. The risk of wrongful trading for directors arises where the company has continued to trade (and incurred liabilities) beyond the point at which its insolvency became inevitable and unavoidable.
A wrongful trading application is made by the company’s liquidator/administrator. To sustain the application, the director must have had, at some point before the winding up or administration of the company, knowledge that there was no reasonable prospect that the company could avoid going into insolvent liquidation or administration. However, the director will have a defence if he/she can prove that, at the relevant time, they took every step available with a view to minimising the potential loss to the company’s creditors.
Typically, the prospect of liability for wrongful trading emerges where a director continues to trade beyond the point at which they should have taken the decision to move the company towards liquidation or administration. This point may be difficult to identify in practice. However, it is usually the point at which there is no prospect of restructuring, new finance or some other transaction/assistance maintaining the business as a going concern. Personal liability is imposed on the basis that creditors, whose position has been worsened by the actions of the director, should be compensated.
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