May 26, 2020

Wrongful Trading – Temporary COVID-19 Changes Introduced by the Corporate Insolvency & Governance Bill


While those in the restructuring and insolvency profession have been attempting to predict what the temporary suspension of the wrongful trading provisions proposed by the government might look like, the Corporate Insolvency & Governance Bill (the “Bill”) is not quite as anticipated.

Wrongful trading is a claim which can be brought (with personal liability) against a director, when a company has entered insolvent liquidation or administration and the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid such proceedings, but nevertheless continued to trade the business. The defence to the claim is that the director took every step to minimise potential loss to creditors. This has understandably concerned many boards of directors during the COVID-19 pandemic and the consequent uncertainty and, therefore, any relaxation to enable confidence to trade is likely to be welcome.

In the Bill, the wrongful trading provisions are not in fact suspended rather modified in relation to determining the proper contribution for a person to make to a company’s assets. The court is to assume that the person in question is not responsible for any worsening of the financial position of the company (or its creditors) during the period from 1 March 2020 to 30 June 2020 (or one month after the coming into force of the Act, whichever is the later).

Importantly, a number of companies are excluded from eligibility for these changes, e.g., insurance companies, banks and parties to capital market arrangements.

Contrast this with the more generous legislation which has been introduced in Germany, which traditionally has a stricter regime than in the UK. The German COVID legislation temporarily suspends (until 30 September 2020 with the option of an extension until 31 March 2021), the statutory obligation to file an insolvency petition if a company is illiquid or over-indebted. The suspension applies if the event of insolvency is caused by the COVID-19 pandemic and also extends to limit the liability of executive bodies. The suspension is strictly on the basis that the reason for insolvency is based on the consequences of the COVID-19 pandemic and there is a prospect of eliminating the inability to pay, e.g., by way of state aid, financing or restructuring.

Back in the UK, whilst the changes should provide boards with the confidence to continue to trade where appropriate, this must be balanced by the fact that directors’ duties prescribed by the Companies Act 2006 (e.g., the duties to promote the success of the company and to exercise due care, skill and diligence etc.), and the Insolvency Act 1986 (e.g., misfeasance or fraudulent trading) still remain in force. It remains critical, possibly now even more so, that directors document every decision contemporaneously and seek specialist advice where appropriate to ensure compliance with their duties.

See related posts:

UK Government Publishes UK Restructuring and Insolvency Law Reforms

Winding-Up Petitions – COVID-19 Temporary Restrictions Introduced by the Corporate Insolvency and Governance Bill 2020


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The post Wrongful Trading – Temporary COVID-19 Changes Introduced by the Corporate Insolvency & Governance Bill appeared first on COVID-19 Response Blog.

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