Each such decision, however, will remain highly fact specific and to mitigate potential liability boards should continue to seek professional advice. Further, the government are to rush through legislation to introduce the long awaited Restructuring Moratorium that will allow companies to file documentation at Court to immediately fend off creditor pressure. However whilst Schemes of Arrangement are relatively common in the M&A world, it is not a ‘go to’ insolvency tool for SME’s facing severe and immediate cash flow difficulties with less access to sophisticated forms of funding. Despite businesses and directors welcoming government schemes to help cash flow during the COVID-19 pandemic (see previous article from Patricia Grinyer on available funding), the availability of various forms of funding has raised a further question; whether directors should be taking on debt in such uncertain times? Insights, events and opinions on the latest law, legislation and policies. If they fail to take every step after this point to minimise any further potential loss to the company’s creditors. Guidance Note: Wrongful trading and Covid 19 (Issued by the Viscount on 13 May 2020) The purpose of this guidance note is to explain the rules on wrongful trading in Jersey and to clarify how these may be applied during the current public health crisis. Coronavirus: wrongful trading - a (bit. We continue to receive calls from clients who are concerned about the viability and solvency of their business as a direct consequence of COVID-19, particularly questions around their duties and whether they might be at risk from ‘wrongful trading’ liability. The UK government has announced new insolvency measures to prevent businesses unable to meet debts due to the impact of coronavirus from being forced to file for bankruptcy. In March this year, the UK Government suspended wrongful trading provisions so that directors could continue to trade through their companies without any concern that they would be prosecuted. Removing or resetting your browser cookies will reset these preferences. The new changes will certainly help matters for some, the concern is whether they also make life more difficult for others. The current law on wrongful trading is largely contained in section 214 and section 246ZB of the Insolvency Act 1986 (“IA1986”). There are many thousands of businesses across the country that were previously financially sound - with no historic debt issues - whose income has, almost overnight, dropped off a cliff due to COVID-19 and who simply need time to ride out the current period of economic inactivity. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. The wrongful trading provisions will be suspended for all companies – not only those directly affected by the coronavirus pandemic. The Wrongful Trading provisions allow for either an Administrator or a Liquidator (I will refer to them both as ‘office holder’) to pursue directors through the Civil Courts for a personal contribution towards the deficit arising to creditors in the insolvency of the company. This will be a brand new insolvency tool based on the existing scheme of arrangement in Part 26 of the Companies Act 2006 but with the ability to cross class cram down with Court supervision as opposed to the existing ability to cram down creditors of the same class. Wrongful trading suspension 're activated' by UK Government leaving directors with a 2-month "gap" in protection during COVID 19 pandemic November 26, 2020 Today, new legislation comes into force* that provides directors of companies in financial difficulty with a second breathing space from the financial impact of the wrongful trading provisions. Published by Tim Moynihan, Senior Associate The Government has launched a number of initiatives to assist companies and businesses to trade through the current financial stress. Broadly, in pre-COVID-19 era, if the creditor served a written demand for payment of a debt of more than £750 (statutory demand) ... What is the Wrongful Trading regime? Most people understand that forbearance needs to be encouraged during this period of financial hardship but should this apply to bad debtors who were being chased for payment long before COVID-19 had any impact? In addition, as the … This new tool will simply allow for groups of creditors that are pre-categorised to have their rights compromised (subject to minimum requirements), even if they have objected to the plan. Did you find this article informative? It has steady trade during the winter months, but relies on heavy tourist trade in summer to cover the slower winter period. As such, directors should continue to seek advice on how to record their decision making throughout this period. Directors should not continue trading whilst insolvent to the detriment of the company’s creditors or they will fall foul of the wrongful trading provisions. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. The current economic climate is unprecedented and any steps by the government to help business weather the storm should be welcomed. This suspension ended on 30 September 2020. In addition, the Restructuring Plan requires two Court hearings for sanction and at a time where Court hearings are being routinely adjourned across the board now does not seem to be the right time to burden the system with a relatively Court intensive process. Third-Party cookies are set by our partners and help us to improve your experience of the website. This is clearly a very real concern for directors and a suspension of this potential liability will clearly take some of the risk away when deciding whether to continue trading through this period. When a statutory demand is served on the company, and the debt is not satisfied or secured to the creditor’s satisfaction, or legitimately disputed within 21 days. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). wrongful trading rule The UK Minister of Business, Alok Sharma MP, recently announced an action plan that would give vital support to frontline National Health Service staff battling Covid-19 and support businesses under pressure as a result of the coronavirus outbreak. Wrongful trading As described above, the most common concern for directors faced with a potential insolvency is wrongful trading under section 214 of the 1986 Act. At this stage we do not know what the final legislative changes will look like but we have an idea given that similar provisions were previously announced back in 2018 but were delayed due to Brexit. To control which cookies are set, click Settings. It is unclear whether a previous proposal to exclude already insolvent companies will still apply in the current circumstances; The Company must have a genuine prospect of rescue; The Company must demonstrate that it has sufficient funds to carry on its business during the moratorium, meeting current and new obligations as they fall due. Click here for a full list of third-party plugins used on this site. The change, backdated to apply from 1 March 2020, will allow directors of companies to pay staff and suppliers even if the company is facing insolvency. If, after the company has gone into insolvent liquidation or administration, the court is satisfied that a director failed to comply with this duty, the court can order the director to make a compensatory payment for the benefit of creditors. Act with caution if they begin to notice that their company is having financial difficulties. The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020. The issues would appear better dealt with through the use of Court discretion, assisted by guidance which in the past has been aided through processes such as ‘Dear IP’ letters from the Insolvency Service providing guidance on how the Government wants the sector to approach such claims if the alleged conduct has arisen from a business severely hampered by COVID-19. If the company carries on trading with the intent to defraud its creditors or the creditors of any other person. This announcement will no doubt be of some comfort to directors. The cram down process is similar in nature to the existing CVA and Scheme procedures whereby objecting creditors can be bound into an arrangement that compromises their existing rights. The cram down of creditor claims originates from the US Chapter 11 Bankruptcy process that is supervised by the Courts (and which is due to be replicated here via the Restructuring Plan) but at present a cram down is a more generalised concept for the forced imposition of restructuring proposals which often will compromise a creditors rights and/or debts even where a minority of creditors and/or shareholders have objected, such as with a CVA or Scheme. The IoD secured a key legal protection for directors around insolvency and wrongful trading during the coronavirus crisis. This has negatively impacted on revenue. Some of the ways a director can be found liable include: Now that wrongful trading is no longer suspended, directors should ensure that they: If you are concerned about the financial position of your company or would like to discuss this further, please contact Aman Sehgal via the contact details below. There are two aspects of wrongful trading and misfeasance that are of interest (i) board directors (and those advising the board) must be aware of the duties that the directors are subject to in performing their role as directors and the liability that attaches to breach of those duties and (ii) companies may be affected by the wrongful trading/misfeasance of customers/suppliers which impacts on trading. The suspension will last for three months. It remains to be seen whether the courts will give greater latitude in relation to this exceptional period, or make examples of individuals who have sought to take unfair … The previously proposed criteria were: We will of course update this article as and when the final government legislation is published. Successful ‘wrongful trading’ claims are a relatively rare occurrence because the provisions of section 214 and 246ZB IA 1986 already contain a mechanism to help protect directors in special circumstances such as these provided that they “do the right thing” and take appropriate steps to mitigate losses to creditors. Wrongful trading is a claim which can be brought (with personal liability) against a director, when a company has entered insolvent liquidation or administration and the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid such proceedings, but nevertheless continued to trade the business. The Company must be “prospectively insolvent”, i.e. We do not want measures that could potentially push creditors into an insolvency process as a result of their inability to recover their debts, particularly those incurred pre COVID-19. This article is for general information purposes only and does not constitute legal or professional advice. If they allow the company to continue to trade whilst there is no reasonable prospect of the company avoiding an insolvent liquidation or administration. Successful ‘wrongful trading’ claims are a relatively rare occurrence because the provisions of section 214 and 246ZB IA 1986 already contain a mechanism to help protect directors in special circumstances such as these provided that they “do the right thing” and take appropriate steps to mitigate losses to creditors. Will rushing in the Restructuring Moratorium simply allow bad debtors more time to pass their cash flow difficulties on to suppliers? Officeholders will continue to have misfeasance and fraudulent trading claims in their armoury for director misbehaviour during the Covid-19 period and, as discussed further in our previous article, directors can still face disqualification. COVID -19 Restructuring/Insolvency & wrongful trading – Governmental update, Construction frameworks and facilities management, Partnerships and Limited Liability Partnerships, Employment contracts, policies and procedures, Management of trade disputes and industrial action, Disputed wills, trusts and estates solicitors, see previous article from Patricia Grinyer on available funding. The principal concerns surround the continued payment of staff, thereby triggering additional employers PAYE and NIC liabilities to HMRC, and incurring further credit with suppliers should the company later become insolvent as a result. Please note that the law may have changed since the date of this article. With suggestions of a possible six month lockdown, creditor enforcement powers have and will continue to be severely curtailed without the need for legislation. The relaxation of wrongful trading provisions during the COVID-19 crisis should enable directors to more easily evaluate such decisions and in so doing reduce the prospect of large numbers of companies becoming cashflow insolvent. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. The government release does stress that the new legislation will ensure that suppliers are protected so we will have to wait and see what these protections look like. Previous consultations have suggested that the Restructuring Moratorium will be modelled on the existing Administration Moratorium, and triggered by an out-of-court filing. Seek advice from a professional in the early stages to limit their personal liability and prove that they were acting in the best interests of the company by seeking advice. If they are found guilty of misfeasance as a result of breaching their duties as a director. Directors should note that this planned relaxation of their duties will only apply to ‘wrongful trading’ The government has specifically stated that “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”, including those relating to ‘fraudulent trading’, ‘misfeasance’ and the threat of director disqualification. This analysis looks at directors’ duties, particularly concerning wrongful trading, in the context of companies facing financial difficulties as a result of coronavirus (COVID-19). Why should those directors potentially be at more risk than someone who finds themselves in a similar position once the period of suspension of claims comes into force? Last Saturday (28 March 2020), Business Secretary Alok Sharma announced changes to UK insolvency law as part of the Government’s response to the Coronavirus pandemic. Once a director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, they have a duty to take every step which a reasonably diligent director would take to minimise potential loss to the company’s creditors. unless action is taken the business will become insolvent. However, the Government recognises that there will be a stage when some businesses will be looking at whether they can and should continue. At the earliest opportunity raise any concerns about the company’s finances with their accountants or fellow directors. The government also needs to be cautious that in, rightly, seeking to protect businesses and their directors with these new measures that they do not increase the severity and impact of COVID-19 further down the supply chain. This has been anticipated for some time as a move to adopt a process similar to Chapter 11 Bankruptcy provisions in the US. Previous proposals were for an initial 28-day extendable period to allow time to put in place a plan to resolve trading issues but it remains to be seen whether the new legislation will extend this to cover the entirety of any ‘lockdown’ period. Wrongful Trading may result in Directors becoming personally responsible for company liabilities if proven that they failed to minimise Creditor losses. Whilst the Restructuring Plan will be a welcome tool and does seek to deal with certain issues lacking in the current UK insolvency landscape, it is not apparent that any of these issues are COVID-19 specific and therefore the question has to be asked … why now and why not after a fuller parliamentary debate can be concluded? Coronavirus, Insolvency & Wrongful Trading. The only current options for a company seeking a moratorium on creditor actions are to either instigate formal insolvency proceedings or enter into a CVA moratorium for a small company. 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