Covid-19 wrongful trading provisions suspension

As the global COVID-19 crisis continues, the UK government has recently announced that wrongful trading provisions under s.241 of the Insolvency Act 1986 (the “Act”) will be retrospectively relaxed from 1 March 2020. This will apply for a three month period.

Directors of a company normally owe their duties to the shareholders of that company.

But when a company is insolvent, or is likely to become insolvent, the director’s duties switch to being primarily owed to a company’s creditors. We have written before about director’s duties in our blog “Director’s Duties in the Twilight Zone”.

An offence of wrongful trading under s.241 of the Act is where directors knowingly make transactions through the business when they know (or should know) it is insolvent or has no reasonable prospect of avoiding insolvency. Such directors, if found guilty, could be made personally liable for creditor debts.

The aim of the temporary suspension in the face of the COVID-19 pandemic appears to be a pragmatic one from the government, primarily to stop struggling businesses from folding in these extraordinary circumstances.

This will of course provide a good portion of relief for directors facing trying times.

Directors should, however, continue to exercise great care. Despite the moratorium on the wrongful trading regime, directors could still commit a number of offences in the difficult economic landscape. For example:

• The offence of fraudulent trading remains in place. This is an offence under s.213 of the Act where directors incur liabilities with an intent to defraud creditors before the company enters an insolvency process.

• A company transaction could still be challenged under s.238 or s.239 of the Act if a company then enters an insolvency process. This is where a transaction is undertaken in preference for one or more of its creditors or where a transaction is undertaken for no, or
insufficient, value.

• Directors can still be prosecuted for misfeasance under s.212 of the Act if the company later enters an insolvency process. This can include a director misapplying or keeping company monies, or otherwise not complying with directors’ duties; quite the wide brush.

• Directors’ disqualification rules still apply. If a director or former director undertakes conduct which makes them “unfit” they will be disqualified (or agree to a disqualification undertaking).

Sanctions for directors who commit these offences can include personal liability and/ or disqualification for acting as a company director in the future.

Further announcements from the government will no doubt follow as the COVID-19 crisis continues.

In the meantime, directors should remain vigilant and take professional advice if they consider there is a risk that their company may become insolvent. They may need to consider personal advice, as well as separate advice for the company. Additionally, it would be sensible for board meetings to be held regularly (albeit remotely) during this period and for all board decisions to be properly recorded.

Joshua Jefferies is a managing associate at Grosvenor Law and regularly advises on complex commercial matters including fraud and conspiracy related disputes.

The contents of our blog posts do not constitute legal advice and are provided for general information purposes only