Company directors risk wrongful trading claims as lockdown restrictions are lifted
Coodes Solicitors’ Head of Commercial Disputes, Abi Lutey, says company directors could still face wrongful trading claims as lockdown restrictions are lifted.
While the roadmap to recovery is welcome news to many businesses, the effects of the global pandemic continue to have a negative financial impact on businesses and the economy generally. Directors of companies that are struggling may face greater scrutiny in the months ahead.
During the pandemic, many company directors have been in the unenviable position of making difficult decisions in uncertain and challenging trading conditions with those decisions often having to be made quickly as a result of speed of change.
The end of the temporary relaxation on wrongful trading and the associated risks
The Corporate Insolvency and Governance Act 2020 introduced a temporary relaxation on wrongful trading provisions. It was put in place as part of the Government’s Covid-19 response to protect businesses that were struggling because of the pandemic and to try and prevent insolvencies from arising.
Within those temporary measures was the suspension of liability for wrongful trading. That suspension is due to expire on 30 April 2021 and has so far has not been extended (unlike certain other temporary measures). The provision worked by creating an assumption that the individual directors’ decisions were not responsible for any worsening of the financial position of the company or its creditors that occurs during the ‘relevant period’ (currently 30 April 2021).
Post-April, directors could be subject to a wrongful trading claim if their company goes into liquidation or administration.
It is also worth noting that other types of claim such as a preference claim/fraudulent trading claim may still be brought regardless of the protections mentioned above and therefore directors must continue to exercise their normal duties during the pandemic.
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What does this mean in practice?
Once a company has entered insolvency it is too late to prevent a wrongful trading claim. The company will undergo a balance sheet test and cashflow test. This financial scrutiny will seek to uncover any mishandling of finances over the previous months. Directors owe a duty to the company and its creditors and are required to act accordingly when they know or ought to know that the company is likely to become insolvent.
The key is for directors to reduce the risk of wrongful trading claims by not continuing to trade if the company is facing significant financial difficulties. That means having a strategy to deal with any difficulties and holding regular and well-documented board meetings.
Getting legal advice at the earliest stage can help you to mitigate against the risk of future wrongful trading claims and support you through the insolvency process.