Wrongful trading occurs when a director of a company has continued to trade a company past the point when he “knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation”;
Insolvency Act 1986 (ss. 214 and 246B IA86) imposes an obligation on a director to take every step to minimise potential loss to the company’s creditors.
The court may order a director who is found liable of ‘wrongful trading’ to make a personal contribution to the company’s assets, where the company is worse off as a result of the continuation of trading.
The purpose of attributing personal liability to a director for breach of the wrongful trading rules is to stop directors continuing to trade companies beyond the point of no return.
Consideration of these rule is often a trigger for directors filing for formal insolvency proceedings, i.e. to minimise the risk of incurring personal liability.
A director held liable for wrongful trading may also be subject to a disqualification order under the Company Directors Disqualification Act 1986.
The Corporate Insolvency and Governance Bill temporarily removes the threat of personal liability from directors who continue to trade a company through the present crisis.
For example, a restaurant has been forced to cease trading due to the crisis. Many employees are furloughed, but some kitchen staff are retained as a limited take away service is operating. Cleaners are still on contract. Quarterly rent is due in July.
The director has a difficult choice to make. Can he continue to trade, buy in stock etc, to keep the business ticking over at a base level and maintain customer relations, all with the hope of a full reopening? Or does he stop now?
Removing the threat of personal liability does not diminish the difficulty of the decision, but it does mean that a director can take steps without fear of the impact on himself and his family.
If you have any questions regarding the scope of the temporary changes or wish to discuss alternative options, please contact us 01892 773100