A lifeline to businesses: changes promised to the ‘wrongful trading’ provisions of current UK Insolvency legislation

Kerman & Co. website
March 30, 2020 Advisory

At the end of a week that saw wide-scale reporting that the Italian restaurant chain Carluccio’s is the latest high street name threatened with insolvency, with the risk to a further 2,000 jobs, the Business Secretary Alok Sharma announced on Saturday (28 March) a temporary, three-month, suspension of the wrongful trading provisions of the UK’s Insolvency legislation.  For further information about the key risks for directors during the COVID-19 crisis see this article.

The wrongful trading provisions set out in section 214 of the Insolvency Act 1986 provide that a director will be personally liable to contribute to the assets of a company if, before the company went into liquidation or entered administration, the director knew or ought to have concluded that there was no reasonable prospect that this could be avoided and they failed to take every step that ought to have been taken to minimise the potential loss to creditors.

The promised relaxation of the rules against wrongful trading will be particularly helpful in the current very difficult climate, so that businesses can continue to trade, and incur liabilities, in circumstances where a prudent board of directors may otherwise have chosen to ‘shut up shop’ and place the company into liquidation or administration rather than face the risk of a subsequent claim against them personally. As Mr Sharma said, the changes would mean that otherwise viable businesses can “emerge intact the other side of the Covid-19 pandemic”, and further wide-scale damage to the economy can be avoided.

Helpfully, these changes will be retrospective covering the period from the beginning of March 2020.

The Government has said that other temporary measures being implemented include enabling companies to buy much needed supplies, such as energy and raw materials, while attempting a corporate rescue.

Legislation to implement these changes will be introduced into Parliament at the “earliest opportunity

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.

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