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Wrongful trading and COVID-19: Advice for directors

The coronavirus outbreak has led to substantial changes in our society. Employees are working from home, businesses are being forced to close their doors, and the government continues to roll out amended legislation to deal with the effects. Amongst these amendments lie changes in the law surrounding wrongful trading. Regular rules surrounding the actions of directors facing insolvency have been suspended. This means that, during the outbreak, those facing financial difficulty will not be penalised for actions that may lead to wrongful trading.

Though these are necessary changes to legislation which protect directors from the effects of the outbreak, it is crucial to remain vigilant of your company’s financial position during this period.

From 25 November 2020, a temporary removal of the threat of personal liability for wrongful trading for directors has been extended to 30 June 2021.

What is wrongful trading?

When a company is facing financial difficulty and is facing a state of insolvency, it is crucial that directors acknowledge this. Upon coming to this conclusion, they must do everything in their power to ensure that the situation of the company’s creditors is not worsened further.

If a director fails to recognise the signs that their company is facing insolvency, or simply does not act on this, they may be found guilty of wrongful trading.

Committing wrongful trading comes with serious consequences, including directors being held personally liable for repayment of a portion, or all, of their company’s debts. They may also face a ban of up to 15 years from holding the position of director over any company.

How have wrongful trading rules changed?

In response to the economic impact of COVID-19, the government announced last month that parts of wrongful trading legislation would be suspended for the next three months, beginning retrospectively on the 1st March. The purpose of this change is to protect directors from incurring personal liability over the debts of their company during the outbreak.

The change does not, however, provide companies with immunity from incurring further liabilities from their creditors. The amendment is intended to aid directors in making the decision to continue to trade, without the immediate danger of incurring personal liabilities should the company later become insolvent.

It has been stressed that, though protected from becoming personally liable for their company’s debt, all other checks and balances ensuring that directors fulfil their duties will remain in force. Directors may still face disqualification of up to 15 years if they are found to have committed wrongful trading. It is important, therefore, that directors react correctly when handling a company facing financial difficulty.

How should directors react?

Despite the changes to the legislation, it is vital that directors remain vigilant with regard to their company’s financial situation, and their own actions. If your company is facing financial difficulty, and may face becoming insolvent, it is crucial to act as quickly as possible.

If your company is facing difficulties with cash flow, and is struggling to keep up with its liabilities, there are several steps you can take to control the situation before it gets further out of hand.

How we can help

Once you recognise that the financial state of your company is declining, it is crucial that you make contact with insolvency professionals, such as ourselves, as quickly as possible. We have the expertise to talk you through the steps you can take to secure the situation of your company, and provide the best possible outcome for both you and your creditors.

  • Company rescue: Arrange an affordable debt repayment plan

For companies with a viable business model, who are facing financial difficulties, there are a number of company-rescue options available. With our help, an affordable debt repayment plan can be established alongside creditors through means of a company voluntary arrangement (CVA). This provides your creditors with regular, monthly repayments of what is deemed to be an affordable amount in your company’s position. It also protects the company from further action from creditors during the period of the arrangement.

More on company recovery options

  • Company closure: creditors’ voluntary liquidation

If the financial position of your company is deemed to be beyond rescue, and the sensible option is to cease trading, we can help. Through means of a creditors’ voluntary liquidation (CVL), the company may close its doors, and have its assets realised to provide the best possible return for its directors. Action such as a CVL can secure the situation before it gets further out of hand, helping to protect directors from falling into wrongful trading, and facing penalisation for their actions.

More on company closure options

In summary

The COVID-19 outbreak has led to the government taking unprecedented action to protect both public health, and the economy. Recent changes to legislation have seen wrongful trading rules amended to protect directors from incurring personal liabilities for their company’s debts.

These amendments are intended to aid directors in making the decision to continue trading, without the immediate danger of personal liability, should the company become insolvent. They do not, however, protect directors from penalisation for their actions, if they are found to have worsened the position of their company and its creditors. Directors’ disqualifications of up to 15 years may be still be enforced in line with the amendments.

It is crucial, therefore, that directors remain vigilant of their company’s financial position. They must recognise the signs of deterioration in their company’s position, and must take action upon realising these to be present.

Making contact with insolvency professionals, such as ourselves, is a crucial first step in taking control of the situation. With our help, insolvency procedures can be put into place to either rescue the company from its declining situation, or liquidate in order to provide creditors with the best return possible.

Directors must take responsibility for their actions in ensuring that their company’s position is controlled by all means possible. If you recognise signs of decline within your company’s financial situation, do the right thing: get in touch today.

Beverley Horton

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