Insights 31.3.20 Authors: John Dickinson, Joseph Colley

Temporary changes to wrongful trading provisions due to COVID-19

Insights 31.03.2020 Authors: John Dickinson, Joseph Colley

On 28 March 2020, the Government confirmed that the wrongful trading (s.214) regime for distressed and insolvent companies was to be temporarily relaxed (retrospectively from 1 March 2020). Whilst this will offer some comfort to Directors faced with difficult decisions, Directors' duties and certain trading offences remain in place and we would recommend that Directors continue to trade very cautiously during this period.

Directors’ duties during periods of financial distress

Under normal circumstances, Directors of a company owe their duties to the members of that company as a whole. However, where a company is, or is likely to become, insolvent, the interests of the company’s creditors take priority. Breach of duties to creditors can attract personal liability, disqualification and requirements for the directors to make good improper transfers of assets. These duties will remain in place regardless of the temporary relaxation of the wrongful trading regime and so the ability to say whether a company is in fact insolvent is therefore crucial, particularly as commercial decisions in the interests of creditors may be substantially different to decisions benefiting members.

Wrongful trading and antecedent transactions

The wrongful trading regime applies where a company has no reasonable prospect of avoiding insolvent administration or liquidation. Although the regime has been temporarily relaxed, the offence of fraudulent trading (incurring liabilities that the directors know will not be settled before the company enters an insolvency process) remains in place, and knowledge of the company’s solvency will have a direct bearing on any Director’s potential liability for that offence.

Certain transactions may also be challenged under the insolvency legislation, including: a company entering into transactions preferring one or more of its creditors over others; transactions for no, or insufficient, value; and transactions defrauding creditors. All of these will continue to apply during the wrongful trading suspension period, and require careful analysis on an ongoing basis. Directors’ duties must be assessed on a company-by-company, rather than group, basis.

What can Directors do to protect their position?

Commercial considerations:

  • Consider the availability of Government-backed aid including:
    • The Coronavirus Business Interruption Loan Scheme (“CBILS”) for SMEs;
    • The Covid Corporate Financing Facility for large companies; and
    • The Coronavirus Job Retention Scheme

The Government-backed loans are just that, and so consideration should be given to repayment, particularly once the interest-free period on any such loan lapses.

  • Review key contracts for, among other things, force majeure clauses
  • Maintain dialogue with suppliers over their contingency planning, to reduce secondary exposure to risk further up the chain
  • Continue to carry out forecasting, modelling shutdown periods of best and worst case impacts on trade
  • Where appropriate, seek specialist advice on contingency options. Obtaining advice of this kind should give directors better visibility on the likelihood that they are in wrongful trading territory, and may lessen the chances of liability should the company ultimately enter an insolvency process

Legal considerations

  • Seek legal advice, independently from the company’s or group’s advisors, particularly where a business is at risk of collapse as a result of the ongoing situation
  • Hold regular board meetings, and prepare contemporaneous minutes to document any key decision made about the ongoing operations of the business
  • Review the terms of any banking documents to establish whether financial covenants may be breached, or if other default provisions have or will be engaged, consider whether to open dialogue with creditors

What next?

If you are unsure about any of the above, the CBW Corporate Recovery and Insolvency team is here to assist and we have extensive experience of advising boards and Directors in these circumstances. We also have a dedicated team that is working with clients seeking Government assistance via the CBILS scheme.