Coronavirus, Insolvency & Wrongful Trading
Once a view is formed that the company is insolvent, the focus of a director’s duties switches from acting in the best interest of the company and its shareholders to acting in the best interest of creditors. If a company considers that it may not be able to pay its debts as they fall due, directors must take separate legal advice.
The Government has announced proposals to try and enable companies to continue trading through this period and help them avoid insolvency. This includes temporarily suspending wrongful trading retrospectively from 1 March 2020 for three months for company directors so that they can keep their businesses going without the threat of personal liability.
A director who ordinarily allows a company to continue trading when there is no reasonable prospect that it will avoid going into a formal insolvency process, can be required to contribute to the company’s assets. This relaxation will be welcome, particularly if the company takes out additional lending in an effort to save the business and in so doing, directors could potentially expose themselves to personal liability if the business ultimately fails.
Note that the existing laws for fraudulent trading and the threat of director disqualification will continue and these laws have not been relaxed.