Welcome relief for Directors and LLP members as Government is set to relax the rules on wrongful trading
The statement by Business Secretary Alok Sharma on 28 March 2020 confirming a temporary suspension to the rules on wrongful trading, will come as a major relief for company directors and members of Limited Liability Partnerships (“LLPs”) alike, who are working hard to maintain their business and workforce and trade through the Covid 19 Pandemic crisis. But what does this mean in practice?
Ordinarily, where a company enters insolvent Liquidation or Administration, the directors of that company could, pursuant to Section 214 and Section 246ZB of the Insolvency Act 1986 (“IA86”) respectively, be personally liable to contribute to the insolvent company’s assets. The Court will make an order requiring a personal contribution by a director if it can be shown that at some time before the commencement of the winding-up or Administration of their company, they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent Liquidation / Administration.
A director will not however be liable to a declaration of wrongful trading and by that, ordered to contribute to the insolvent company’s assets, where the Court is satisfied that the director took every step with a view to minimising the potential loss to the company’s creditors. Such steps are not defined in the statute, but in practice they usually consist of (amongst others) regular convening of board meetings, preparation of management accounts and cashflow forecasts and taking professional advice from accountants and lawyers.
The provisions in and potential personal liability for wrongful trading at Section 214 and 246ZB IA86, apply to and fall equally on members of LLPs in the same way as they do to directors of companies.
Whilst we await the full details of the Government’s temporary suspension to the wrongful trading rules, the announcement that these will be relaxed should give added peace of mind for directors. The Government has in recent weeks taken unprecedented steps in actively encouraging directors to maintain employment and take out emergency government backed loans to continue trading. Any director would naturally be concerned over maintaining overheads & spending and incurring additional borrowing in such stressed times, where there is a risk of personally liability for wrongful trading should their companies ultimately enter insolvency. The relaxation and temporary suspension to the wrongful trading rules however, should go some way to addressing the inhibition amongst directors and LLP members to take up the Government backed schemes.
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