On 28 March 2020 the Secretary for Business, Alok Sharma, announced a suspension of the “wrongful trading” provisions to allow businesses to keep going during this crisis.
Legislation is yet to be set out but it will be retrospective to 1 March 2020 and means that directors, who are often concerned about the liabilities they can accrue under these provisions, can keep businesses going without worry about being pursued later.
Ordinarily wrongful trading arises when a director:
“at some time before the commencement of the winding up of the company, […] knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration.”
If made out (and subject to certain defences) then such a director may be required to pay into the liquidation. This therefore circumvents the limited liability of a company and provides a potential additional source of funds in liquidation.
Such a contribution may not be insignificant as the Court’s view in Re Produce Marketing Consortium (1989) 5 B.C.C. 569 was:
“the appropriate amount that a director is declared to be liable to contribute is the amount by which the company’s assets can be discerned to have been depleted by the director’s conduct which caused the discretion under sec. 214(1) to arise”
However, then goes on to point out that the words chosen are very broad and would not set out limits on that discretion. Questions of the extent of such contribution have been quite strenuously argued and are open to challenge.
It must be noted that section 214 of the Insolvency Act follows section 213 – and that concerns fraudulent trading – which occurs where:
“any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose”.
The importance of section 213 and 214 together is that “wrongful trading” does not need any fraudulent intent, merely the actions themselves.
This suspension is a welcome relief to allow directors who innocently trade whilst insolvent during this unprecedented crisis.
Parliament has published Commons Briefing Paper 8877 which discusses the implementation of this and other, welcome, insolvency reform which is being driven through to support UK businesses.