The wrongful trading law is suspended
The wrongful trading law is suspended, so directors are off the hook – right?
The Government’s announced it will introduce new insolvency procedures to protect businesses, and temporarily suspend the wrongful laws. It’s not clear when these changes will take effect or what they will actually look like. Parliament isn’t back until late April, so it’s unlikely we’ll know until then. This article looks at the suspension of wrongful trading, and out next will look at the other changes.
To answer the above question – wrong. Some commentators say the suspension of wrongful trading leaves it open to directors to abuse. I’m not convinced. The other relevant laws relating to director duties and misfeasance remain in operation. Wrongful trading claims are notoriously difficult to run. Directors being pursued for wrongful trading are likely to have breached a number of their duties along the way, giving rise to breach of duty claims against them that are far easier to pursue.
A wrongful trading claim will usually include a breach of duty claim in the alternative, and the duties of directors remain in place. At present, the government has not suggested any alteration or suspend of director duties. In my view that is right. Good governance is at the centre of the economy and has been the focus as much debate and resulting law for a number of years. Sweeping that aside would do more long term damage than short term good.
So, what effect is this going to have? Psychologically, it will give directors some comfort by allowing them to focus on saving their businesses (and jobs), as opposed to worrying about wrongful trading. However, directors must remember their duties still apply. The key is to remember that their duties changes from being shareholder to creditor focused when they know (or ought to know) the company is on the verge of insolvency. This is discussed in further detail here.
This will be relevant where businesses are taking out business interruption loans, and obtaining similar COVID 19 related support. It’s important directors regularly take the pulse of their companies, remember their duties and document the reasons for their decisions. So they can demonstrate, if needed in the future, why they reasonably believe (as its stands) they will trade through. Other useful tips are here.
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All information in this document is accurate at the time of writing. It is meant for general information only and is not legal advice.