Duties of Directors and Wrongful Trading: Where are we now?
There has been much discussion surrounding the temporary insolvency-related measures introduced by the UK Government during 2020, but what does this really mean for directors and their potential personal liability?
One of the key measures introduced was the temporary suspension of the wrongful trading provisions under the Insolvency Act 1986. This protective measure initially expired on 30 September 2020 but was re-introduced on 26 November 2020. It has since been extended to 30 April 2021. Whilst this temporary suspension provides some protection for directors of businesses that have been impacted by the pandemic and removes the threat of personal liability for wrongful trading, it does not provide a sanction for directors to ignore their statutory duties entirely.
It is important to highlight that the reintroduction of the temporary suspension relating to the wrongful trading provisions is not retrospective. Directors may be at risk of potential liability for trading during the period from the expiry of the initial period on 30 September 2020 and its reintroduction on 26 November 2020.
Under the Insolvency Act, a director who allows a company to continue trading when there is no reasonable prospect of avoiding insolvency, may be liable to contribute to the assets of the company for the benefit of the company’s creditors. The actions of the board of directors, and transactions entered into by the company in the period leading up to the onset of insolvency, will be scrutinised by a subsequently appointed insolvency practitioner, such as a liquidator or administrator. In addition to potential wrongful trading liability, an insolvency practitioner will also scrutinise actions that may be considered a preference, a transaction at an undervalue, fraudulent trading and misfeasance or breach of duty. Directors may also face scrutiny for such actions in the context of directors’ disqualification proceedings.
If your company is experiencing financial difficulties, you may wish to consider taking the following practical steps to protect yourself against potential personal liability if the company subsequently goes into a formal insolvency process:
- Familiarise yourself with your duties as a director of a company in financial difficulty. This may seem obvious; however, it is imperative that directors understand where the duties owed may shift from the company’s shareholders to the company’s creditors.
- Seek independent advice from an insolvency lawyer or licensed insolvency practitioner and engage them to provide support on an ongoing basis if required.
- The board should meet frequently to discuss the company’s ability to continue trading and pay close attention to its financial position. Detailed minutes should be kept of all directors’ meetings, to include details of any decisions made, the reasons behind those decisions and the position of any dissenting directors.
- Review any financing facilities to ensure that the company is continuing to meet its financial covenants and engage with lenders early if you are concerned about any potential covenant breach.
- Do not ignore any demands for payment from creditors and seek legal advice as required. If the company is unable to pay straight away, ignoring those demands may result in the creditor taking further action against the company, such as issuing a winding up petition (if permitted). This may cause serious harm to the ongoing trading of the business.
- In some cases where a board of directors is unable to agree on key issues, a director may consider resigning from the board as a last resort. Any dissenting directors should ensure that their concerns are detailed in the relevant board minutes and are set out in a resignation letter to the board.
- If it becomes clear at any point that there is no real prospect of avoiding insolvency, seek urgent advice from professional advisors with a view to commencing a formal insolvency process.
We would urge any directors who are concerned about their company’s financial position to seek advice early, whether on behalf of the board of directors or in their personal capacity. If you would like to discuss your situation in confidence, please do get in touch with us.
This note is not intended to substitute legal advice from your instructed lawyer. You should always consult with your lawyer directly regarding any specific queries you may have.