Covid-19 response: wrongful trading provisions suspended

In a widely anticipated move, Alok Sharma, the Business Secretary, has announced that the wrongful trading provisions under the Insolvency Act 1986 (“the Act”) will  be suspended for three months.

Under section 214 of the Act, a company director may be required to pay compensation if the company goes into insolvent liquidation and the Court concludes that the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration.  In recent times this provision has been giving business leaders and advisors a headache, with hard-pressed businesses having to balance the desire to take up Government support and continue trading against the risk of personal liability if the business later collapsed. 

The Government has been at pains to stress that it will not let viable businesses fold as a result of the pandemic.  The relaxation of the wrongful trading provisions is a logical next step.  The precise terms of the implementing legislation have not yet been published however the changes will take effect with retrospective effect from 1 March and last for three months.  That is less generous than the equivalent Australian rules which will apply for six months (albeit not retrospectively).  The UK Government have said however that the changes may be extended if necessary.

Notably, the wrongful trading provisions will be suspended for all companies – not merely those affected by the pandemic.  Other countries, including Germany, have limited their Covid-19 related assistance to businesses affected by the pandemic – albeit with a presumption of such effect.  The blanket approach adopted by the UK Government has the benefit of simplicity, but there remains a risk of abuse by companies that were financially precarious even absent the pandemic and which may now think themselves free to trade with impunity.

It would be a mistake however for company directors to relax too much:

• The fraudulent trading provisions under section 213 of the Act will continue to apply.  If a company’s business is carried on with intent to defraud creditors or for any fraudulent purpose, there will remain the prospect of recourse to directors or any other parties who were knowingly parties to carrying on the business.
  
• The directors of a company which is insolvent or in the zone of insolvency will continue to owe their duties primarily to the company’s creditors rather than its shareholders.  More than ever at this time, directors will need to take professional advice and minute their decision-making to demonstrate that proper account has been taken of creditors’ interests when making major decisions.  Careful consideration will need to be given to whether there is a greater than ordinary business risk of the business failing, and of the interests of creditors in major decisions.
  
• The directors’ disqualification rules will continue to apply.  If a director or former director of an insolvent company is found to have engaged in conduct which makes him unfit to be concerned in the management of a company, he must be disqualified or have a disqualification undertaking accepted.The antecedent transaction provisions will continue to apply – preferences, transactions at undervalue, transactions defrauding creditors.  Given that more companies will now be insolvent within the meaning of section 123 of the Act, it is likely that more transactions will come under liquidators’ microscopes in the months and years ahead.
• The misfeasance provisions will continue to apply – enabling liquidators to bring summary proceedings for breach of fiduciary or other duty.  In recent years there has been a pick-up of such claims as litigation funders have moved into the market; that seems unlikely to diminish.
  

Further announcements are likely to follow.  At present there is no general moratorium on the right to present a winding up petition, however a blanket adjournment of pending petitions has been announced on the basis that the winding up list could not feasibly be heard under the Remote Hearings Protocol.  Affected companies will still need to seek validation orders to enable them to continue trading while the petition is pending given that any dispositions post-presentation of the petition will be prima facie void.

The minimum debt for serving a statutory demand on an individual remains £5,000 – having been raised from £750 in 2015.  So far there is no indication that the Government proposes to increase this – by contrast with Australia which has increased the minimum threshold from AUD $2,000 to $20,000 (c.£9,800) and the time for complying with the demand from 21 days to six months.  However it seems likely that reforms for individual insolvency will ensue.

Other recent announcements include changes to enable flexible holding of AGMs through postponement, holding the meeting online, or by phone with only proxy voting.  This followed earlier announcements permitting a three-month delay in the filing of accounts at Companies House and relaxation of other financial reporting requirements.

This article was written by Andreas Gledhill QC and Peter Head.