Suspension of wrongful trading provisions and other changes to insolvency rules

On 28th March 2020, the Government announced a number of temporary measures to improve the insolvency regime, in order to help businesses affected by the coronavirus crisis. Including the suspension of wrongful trading provisions and other changes to insolvency rules.

The purpose of the proposed changes to insolvency rules is to allow greater flexibility as businesses deal with the current crisis.

The proposed measures include:

  • Giving businesses further time and space to deal with the crisis and emerge intact, whilst ensuring creditors get the possible returns;
  • Allow business undergoing a formal restructuring process to continue access to supplies and raw materials; and
  • A temporary suspension of the wrongful trading provisions retrospectively from 1 March 2020 for a period of 3 months.

The last of these is the headline news. Wrongful trading occurs where company directors continue to trade and incur debts to the company, knowing that the company is insolvent, without taking reasonable steps to prevent a loss to the company’s creditors. The Insolvency Act provides that a director of a company may be subject to personal liabilities where they are found to have traded wrongly. Further, a finding of wrongful trading may lead to a disqualification order made under the Company Directors Disqualification Act 1986.

The purpose of the proposed changes is to allow directors flexibility and breathing space to allow a continuation of trade without the fear of personal liability during the unprecedented difficulties being faced in the UK amidst the Covid-19 pandemic.

These temporary measures do not, however provide directors of pre-existent insolvent companies free reign to continue as business as usual.

These suspensions should only be thought of as temporary and are not a replacement for seeking urgent and experienced insolvency advice if you think that your business is in trouble, particularly as other checks and balances on directors’ actions remain in place.

Our advice, as always, is that if you think your business is in financial difficulties, then urgent advice from a suitable qualified insolvency practitioner is required both to protect your business and also yourself.

For further advice or information, please contact Andrew Pay, Partner and Head of our Insolvency team.

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