Wrongful Trading temporary suspension lifted from 1st July 2021

Judith Howson | 01 September 2021

Wrongful Trading temporary suspension lifted from 1st July 2021

This blog was originally published as a LinkedIn article by Judith on 26th August.

From 1 March 2020 to 30 June 2021 the UK Government suspended the wrongful trading provisions. Wrongful trading in terms of section 214 of Insolvency Act 1986 occurs when a director knew or ought to have known that there was no reasonable prospect of the company avoiding liquidation; yet didn’t take steps to minimise the potential loss to creditors. If wrongful trading is proven, it can result in directors being held personally liable for certain unpaid debts of the company subsequently placed into liquidation, effectively piercing the corporate veil.

The UK Government introduced these suspensions to wrongful trading provisions because businesses were finding themselves in unprecedented and challenging times financially, due to the onset of the COVID-19 pandemic. Also introduced and extended during this time (and now coming to an end) were other initiatives designed to offer similar support to businesses such as the Government Furlough Scheme (tapering from July 2021 and due to end by September 2021), the Coronavirus Business Interruption loan scheme (CBILS) (closed on 31 March 2021) and Bounce back loan schemes (BBLS) (closed 30 November 2020) and a temporary suspension of the use of statutory demands and winding-up petitions to 30 September 2021.

All these measures provided vital and welcome life lines and breathing space to directors, but as these Government support schemes close, directors need to be mindful of continuing to trade, if by doing so they are knowingly worsening the position of creditors because from 1 July 2021, a director’s personal liability for wrongful trading returns and will in all probability be back for good. Whilst many directors will genuinely try everything they possibly can to save their company, if liquidation becomes unavoidable, a Liquidator is statue bound to review the activities and actions of a director from 1 July 2021 and could mount a personal challenge if any conduct worsening the position of creditors, merits taking such steps. A director found personally liable for wrongful trading also risks being disqualified from acting as a director for a period of up to 15 years. Whilst the pandemic will be cited as the reason for a company’s demise for many months, even years, to come, Directors concerned about any aspect of their company’s financial future are urged to seek early advice and guidance as it will inevitably get tougher for businesses once the Government support schemes end this Autumn and creditors are able to take themselves back into Court to sue for unpaid debts. Those seeking such advice should have little to fear from the return of the wrongful trading provisions.

As a member of the R3 Scotland Committee and a member of R3, the Insolvency Profession’s trade body, I have noted that R3 has recently published this useful guide for directors (and other business owners) which is a free to download, useful resource, which explains the duties and responsibilities of directors, outlines informal and formal options when directors are facing corporate financial distress and provides guidance on the different insolvency processes available within the UK:

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