Law in the time of COVID-19: Changes to wrongful trading laws

Article by Naomh Gibson

Wrongful trading is a statutory offence under Section 214 and Section 246ZB of the Insolvency Act 1986. Once Company Directors conclude – or should have concluded – that there is no reasonable prospect of the Company avoiding an insolvent liquidation or, in relation to business conducted on or after 1 October 2015, insolvent administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the Company’s creditors.

If a Director fails to comply with this duty, the Court can order the Director to make such contribution to the Company’s assets as it thinks proper. However, on 28 March 2020 the Government announced it would introduce new insolvency measures to prevent businesses unable to meet debts due to the impact of COVID-19 from being forced to file for bankruptcy.

The move will allow Directors to pay staff and suppliers, even if there are fears the Company could become insolvent. This is a very real concern for Directors and a suspension of this potential liability will take some of the risk away when deciding whether to continue trading through this period.

The temporary suspension takes force retrospectively from 1 March 2020 for a period of 3 months. All other checks and balances to ensure directors continue to fulfil their legal duties and obligations will remain in place, including those relating to fraud, misfeasance, and the threat of Director disqualification. As such, Directors should continue to seek advice on how to record their decision making throughout this period.

In addition to the temporary suspension of wrongful trading provisions, the new measures also include:

  • Permitting Companies who are required by law to hold AGMs to hold them remotely, or where this is not possible, postpone them without sanction, or hold them in-person. Any in-person AGMs will still have to comply with social distancing protocols but will not be considered ‘gatherings’ so as to fall foul of new restrictions;
  • A moratorium for businesses undergoing a restructuring process, during which time they cannot be put into administration by creditors and will continue to be able to access all raw materials;
  • New restructuring plans to bind and safeguard creditors and supplies, to ensure that they are being paid while a solution is sought.  

The new Restructuring Moratorium may be an essential tool for some of these businesses who need extra time to work out a temporary solution to their cash flow issues. Previous consultations have suggested that the Restructuring Moratorium will be modelled on the existing Administration Moratorium and triggered by an out-of-court filing.

The Government states that it intends to introduce the legislation at the earliest opportunity and may extend any of the above measures as necessary, depending on the development of the pandemic. The overriding objective will be to help companies to keep trading.

Other changes to ease the burden of regulation on Companies during this challenging time have already been introduced. On 25 March 2020, Companies House announced that Companies affected by COVID-19 can apply for a 3-month extension for filing their annual accounts. Applications for the extension can be made through a fast-tracked online system (here) and will be treated with latitude where issues around COVID-19 are cited in support. An application for the extension must be made before the company’s filing deadline.