Article 178 of the Insolvency (NI) Order (1989) outlines that wrongful trading occurs when a director continues to trade and incur liabilities on behalf of their business when they were aware, or ought to have been aware, that insolvency was inevitable.
The rapid spread of Covid-19 has brought with it many economic challenges which have left company directors struggling to keep businesses afloat, weary of making decisions and in fear of breaching of insolvency legislation. Under the wrongful trading laws, directors can face disqualification and even be forced to make personal contributions towards the company’s assets.
On 14 May 2020, the UK Government extended the temporary suspension of wrongful trading liability until 30 June 2020. Originally the Government had announced on 28 March 2020 that it would introduce legislation, retrospective to 1 March 2020, to relax the insolvency rules which can make directors of limited liability companies potentially liable if they continue to trade and incur liabilities.
Although this will allow directors some breathing space to focus on business survival, directors should still be cautious when making decisions during this period, as other laws relating to fraudulent trading and disqualification are still very much in force.
Directors have a duty to act in the best interests of the company and take all reasonable steps to minimise losses for creditors. If a company goes into insolvency, the directors have a duty to act in the best interest of the creditors rather than keeping the company running. Some commentators suggest that it is likely that the Government will introduce safeguards to ensure some creditors eventually get paid.
In addition to the moratorium on forfeiture for commercial tenants and relaxed rules on AGMS and meetings already in place during Covid-19, it has been confirmed that Government will introduce new restructuring tools to the UK’s Insolvency Framework. Such tools include imposing a moratorium on creditors enforcing debts on companies while they are exploring restructuring options, protection of supplies for businesses facing an insolvency situation and a new court-based restructuring model.
It is hoped that these measures will come into force as soon as possible. The application of such measures to Northern Ireland will need to be embedded in legislation.
Practical Tips for Directors:
- Directors should ensure they keep a comprehensive record of all decisions made and reasoning behind them.
- Obtain professional advice if in doubt of personal or financial obligations to the company.
- If your company is nearing insolvency, consider all options available including formal and informal arrangements with creditors.
- Keep creditors abreast of supply chain issues and financial problems.
- Review all financial contracts to ensure no breach of covenants has or is likely to occur.
- Review business continuity plans and develop mechanisms to ensure all directors are aware of cash flow, budgets and financial concerns.
If you are concerned about your company including queries about director duties, insolvency or any commercial legal advice for your business, please do not hesitate to contact us on [email protected]
