These are the new rules on wrongful trading as proposed by the Government.
| Government Update, 28th March |
Yesterday evening’s update from the Government was presented by Alok Sharma the current Secretary of State for Business Energy & Industrial Strategy. Amongst other things he referred to an impending change to the current insolvency regime to assist businesses during the ongoing COVID19 outbreak. Whilst he was not specific on the extent of the changes, he did refer to a moratorium on Wrongful Trading against directors. The changes will be applied retrospectively to 1st March 2020 and will be in force for three months.
Wrongful Trading is an offence that occurs when a company is placed into a formal insolvency process (but not a Company Voluntary Arrangement) and the appointed practitioner considers that the director “knew or ought to have concluded” that the company was insolvent earlier than when the actual insolvency event occurred. The nature of a claim is usually that had the director acted at the correct time then the overall loss to creditors would have been less than was reported at the point of formal insolvency.
A successful claim against a director under the Wrongful Trading provisions can result in personal liability (for the difference in the actual financial position between those two dates).The step by Mr Sharma is significant in affording directors every opportunity to save their business even if at this time the financial outlook appears bleak.
What is worrying however is that he also referred to “checks and balances” and reminded directors of their duties to still act properly thereby indicating that the other powers of a practitioner remain. Directors must therefore still be mindful of committing other insolvency offences such as preference payments in the event that the business fails in the coming months.
It will be interesting to see whether these issues are specifically addressed within the changes when they are formally disclosed. The relaxation of Wrongful Trading does afford some comfort. However, directors should not be completely at ease if there is real concern about the company’s financial position, especially when evident pre COVID-19.
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This update is for general guidance only, and professional advice should be obtained in each situation. Holland & Co cannot accept any responsibility for loss to any person as a result of action taken or refrained from, as a result of this article. Please contact Holland & Co before taking any decision based on any matters.