Essentials: Wrongful trading suspended

On Saturday 28 March, Alok Sharma, the UK Business Secretary, took the daily press conference at Downing Street.  The headline announcement was that the laws on wrongful trading would be suspended to protect directors during the COVID-19 pandemic.

Wrongful trading is the principle that, if a company is in financial difficulty and there is no reasonable prospect of avoiding liquidation or administration, and a director should have concluded this but continued to trade, the director can be personally liable and made to make a contribution to the company’s assets for the benefit of creditors.  Liability arises if the company is worse off by continuing to trade.

Clearly, in such challenging times this is likely to be a very real concern for many directors who are attempting to pay staff wages and suppliers despite not having their doors open for business.  The announcement to suspend wrongful trading will protect directors in such situations and allow them to continue to make such payments without fear of being held liable later down the line.  Of course, this will only be a concern if the company later goes into liquidation or administration.

Importantly it was announced that the legislation, once passed, will have retrospective effect from 1 March 2020.

Comment

This should be a welcome change for directors and will help to ease the burden that many businesses are facing.  It is important to remember though that no other director duty has been suspended.  In other words, directors must still continue to act in good faith, in the best interests of the company, and to the best of their ability.

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