Suspension to wrongful trading laws

In March the Government announced that it would temporarily suspend the wrongful trading rules to enable businesses to keep trading through the pandemic if they encounter financial difficulties.

On Wednesday, 20 May, the Corporate Insolvency and Governance bill was introduced to Parliament.

What is wrongful trading?

If a director knows or, crucially, ought to know that there is no reasonable prospect of the company avoiding insolvent liquidation or administration but continues to trade, they are at risk of committing wrongful trading. A director is construed widely and will include shadow and de facto directors as well as those formally appointed.

If the company is worse off as a result of such wrongful trading, and later enters insolvent liquidation or administration, the liquidator or administrator can apply to the court for an order to require the director to contribute to the assets of the company.

If, however, the director took every step they could to minimise loss to creditors, as they should have done, the court will not make this order.

Corporate Insolvency and Governance Bill

The Corporate Insolvency and Governance Bill, among other things, proposes the suspension of those rules, as promised. It goes further, by extending the timeframe to four months from the three months originally announced.

This means that, if the Bill is passed as currently drafted, if a company enters into insolvent liquidation or administration and the court is asked to consider making an order for a contribution by the director, the court will assume that the director is not responsible for any worsening of the financial position of the company that occurred between 1 March 2020 and 30 June 2020. As a result, the director will not be ordered to contribute to the assets of the company in relation to trading during that period.

This means that directors of companies that have suddenly found themselves in unexpectedly tough times do not need to also be concerned about their personal liability in relation to wrongful trading, at least for now. Directors do, though, always need to be conscious of their director’s duties.

There are, however, some exclusions on the types of companies that are able to benefit from this, with those such as such as insurance companies and banks excluded.
It is important to note that there are several more stages for the Bill to go through before it receives Royal Assent and that changes may be made along the way, but as it stands it appears that the rules will be suspended entirely, as promised.

For more information, see the government announcement here.