Robert Kay, Dispute Resolution Partner
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) received its Royal Assent on 26 June this year. Rapidly pushed through Parliament, CIGA 2020 amended insolvency legislation and was designed to provide more favourable conditions to struggling companies throughout the Coronavirus pandemic.
The Act provided for:
- Some companies, in certain circumstances, to gain a moratorium for 20 business days (this could be extended), giving them protection from creditors and allowing them to delay paying certain debts which fell due before and during the moratorium.
- The creation of a Restructuring Plan, which if approved by the Court, would mean some creditors would have to accept revised terms relating to debts owed.
- Prohibition on issuing a winding-up petition based on statutory demands.
- Prohibition on presenting winding-up petitions or making winding-up orders if the evidence showed that if it were not for the pandemic, the circumstances surrounding the petition or order would not exist.
- Prohibition on terminating a supply contract if the reason for doing so is due to one of the receiving parties undergoing an insolvency process.
This is only a small sample of what CIGA 2020 covers and it is beyond the scope of this article to go into further detail. In October 2020, certain provisions of the Act were extended, some until 30 December and others to 30 March 2021.
One key provision that was not extended was the suspension of wrongful trading rules. And this may worry many company directors who fear they could be personally liable to creditors for debts their business has incurred.
What is wrongful trading?
Wrongful trading may be deemed to occur if a company director continues to take on debt when they know, or ought to have reasonably known, that the company was inevitably going to fall into insolvency. If a director knows a company is insolvent (or will inevitably become so), they have a statutory duty to take “every step with a view to minimising the potential loss to the company’s creditors”.
Wrongful trading is considered negligent and irresponsible; however, unlike fraudulent trading, it is not a criminal offence. But it is a serious matter and can lead to director disqualification. Also, directors can be personally liable to creditors if they continue to trade when they know or should have known the end of the business is nigh.
Why were the provisions concerning wrongful trading not renewed?
No explanation was given as to why the deferment of wrongful trading rules was not reinstated when parts of CIGA 2020 were extended in October. It may have been that the breathing space provided by the suspension was not that beneficial. After all, several other sources of directors’ liability under the Insolvency Act 1986 were unaffected by CIGA 2020, for example, the provisions around fraudulent trading. Furthermore, directors still retained a duty under the Companies Act 2006 to consider the interests of creditors if there is a risk of insolvency.
If the suspension of the wrongful trading provisions did not provide many benefits to directors fighting to keep their business afloat, the government’s decision not to renew them is understandable. Creditors are in business too and are equally affected by the pandemic’s impacts. Removing the prohibition on wrongful trading for too long undermines the trust between commercial suppliers and purchasers and could see more businesses collapse due to unsurmountable cash flow problems.
However, not everyone agrees. Roger Barker, from the Institute of Directors, argued in the Evening Standard:
“Reinstating wrongful trading liability adds to the pressure on directors to pull the plug on their companies when long-term viability is still far from clear.
“It makes little sense to have supported these businesses through the summer, only to let them collapse in the winter.”
What should company directors do to protect themselves from wrongful trading investigations?
For directors who are focused on creating new revenue streams to see their business through the pandemic, the last thing needed right now is a civil litigation suit or a regulatory investigation. But the risks of becoming embroiled in regulatory-related problems is high. Even in those golden days before March 2020, when we could socialise and move about without fear, there had been a marked uptick in investigations and prosecutions of company directors suspected of falling foul of trading laws. Once the dust settles, the post-Covid world is expected to be one of litigation and prosecution as creditors attempt to recover losses and the government seeks to claw back some of the billions it has spent on its schemes and measures.
Part of any organisation’s Covid-19 strategy must be to keep a rigid eye on cash flow and balance sheets and complying fully with regulations. If you are unsure of the financial health of your organisation, you should seek professional advice: a ‘head in the sand’ attitude could see you and your business surviving 2020/21 but being crushed by regulators and creditors in later years.
To find out more about our civil litigation service, wrongful and fraudulent trading, or regulatory investigations please get in touch with Robert Kay, a Partner in our Dispute Resolution team.
Please note – this article does not constitute legal advice.
