As announced in the recent press, the government has created a suspension (for 3 months from 1 March 2020) of the personal liability that can fall on a director under what are known as the “wrongful trading” rules.

Wrongful trading is governed by section 214 of the Insolvency Act 1986. Where a director knows or ought to have known that the insolvent failure of their business was inevitable, but didn’t take every step to protect creditors and prevent losses, the director can be made personally liable for those losses.

The steps required to be taken by a director vary from case to case, but can be life-changing for the company; sometimes appropriate financial controls can keep the company safe, but sometimes placing the company into administration or liquidation is the only way to prevent further losses and cap the personal liability of the director.

At this stage, we do not know what the legislation dealing with the retrospective suspension of the wrongful trading rules will look like, and it might not be enacted until the end of April or even early May.

Whilst it is in the present circumstances a pragmatic move, the government’s suspension of the wrongful trading rules comes with a corporate health warning: suspending the wrongful trading rules does not mean that company directors can trade the company without any concern for their own personal liability.

Wrongful trading is not the only pitfall for a director of an insolvent company.  Directors are under further and other duties enshrined in the Companies Act 2006 and breach of those duties can also bring personal liability. Those duties can include not acting negligently, promoting the success of the company or avoiding conflicts of interest.

Similarly, directors remain at risk in relation to sanctions under the Insolvency Act, such as fraudulent trading, transactions defrauding creditors and misfeasance.  Directors must avoid allowing payments which prefer some creditors to others and disposal of assets at undervalue.  Quite often there is a significant overlap between wrongful trading and breaches of Companies Act and Insolvency Act duties.

The details of wrongful trading and other duties and responsibilities of directors are complex and should only be assessed on a case-by-case basis with reference to the particular circumstances of the company in question.  It is not just the effects of the coronavirus that can be causing problems for companies and, far too often, the timescales within which action must be taken are very short.

Assessing whether a company is insolvent requires specialist help, often including guidance on dealing with HMRC, the company’s bankers and other creditors, disagreements in the boardroom, changes to trading operations, and when to call in the administrators or liquidators.

If you are a company director and are concerned about insolvency and the effects of coronavirus on the company, you should act immediately in taking independent specialist legal advice.

Take a look at our previous article on Dos and Don’ts for directors of companies in trouble.

https://nexussolicitors.co.uk/companies-in-trouble-some-dos-and-donts-for-directors/

If you’d like to know if we can help you, please contact Andrew Tonge on ato@nexussolicitors.co.uk or on 0161 819 4905.