Changes to wrongful trading rules and what it means for your company
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Rules about wrongful trading have been temporarily suspended to provide directors with a greater degree of comfort when taking difficult decisions during the COVID-19 crisis – but they must still demonstrate that they have acted reasonably, says Andrew Turner of Lovewell Blake.
Company directors facing difficult decisions during the coronavirus crisis have been handed a potential lifeline with the suspension, backdated to 1st March 2020, of wrongful trading provisions, which might otherwise have hampered their ability to take decisions to secure the future of their businesses.
The current wrongful trading provisions mean that company directors can face personal liability if they fail to take account of the impact on creditors in a situation where trade is continued, when the director knew, or should have concluded, that the company couldn’t reasonably avoid liquidation (or administration) and creditors wouldn’t be paid in full.
MORE: Personal Finance: Can anyone apply for a mortgage holiday? In effect the changes should enable companies to continue trading in the short term, beyond the point where we would normally be advising they should cease, with directors having greater confidence that using their best endeavours to continue trade should not result in them being exposed to personal liability should the company ultimately fail.In the current situation, with much of the economy effectively on pause, many directors are wrestling with decisions to safeguard the future of their businesses, which might otherwise have fallen under the wrongful trading microscope under the regulations. The Government is keen that when we emerge from this crisis as much of the economy is still intact as possible, and this is the reason for the temporary relaxation of the provisions.However, and this is important, the suspension of the wrongful trading provisions are not a blanket waiver; directors do not have a ‘get out of jail free’ card to protect themselves from the consequences of their decisions and actions.They will have to be able to demonstrate that what they do during the crisis is reasonable, and would be most likely to promote the survival of their company. And existing laws on fraudulent trading, transactions defrauding creditors, and misfeasance still apply.Directors facing difficult decisions have a greater need than ever to take professional advice to be in the best position of steering their businesses through the crisis, and in doing all that they can to minimise the risks of potential future action against them.