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Government Announces Second Suspension of Wrongful Trading

Last week, the Government introduced a secondary legislation to reinstate the suspension of wrongful trading, which will apply from 26 November 2020 to 30 April 2021.

The suspension of wrongful trading is due to the same terms that were originally introduced by the Corporate Insolvency and Governance Act 2020, from 1st March 2020 to September 2020. The move was intended to protect directors from liability under s214 IA 1986 if they decided to continue to trade and pay their staff and suppliers during the pandemic. The thought out plan by the Government had hoped to see personal liability for company debts reduced, with directors less likely to rush into a formal insolvency process. In September however, the suspension lapsed, due to the general outlook on the pandemic becoming slightly optimistic.

Now that we were placed into a National lock down and a structured tier system to follow, and a difficult time to trade due to Christmas – the decision has been made to remove the threat of wrongful trading liability from directors.

What is wrongful trading?

The Insolvency Act of 1986 wrongful trading, refers to companies that continued to carry on their daily business trading insolvent, that is unable to pay their debts as they fall due. Directors usually do this as they believe that things may start to improve even though their business continues to spiral downward.

When there is a case of wrongful trading, there tends to be no intent to defraud the company’s creditors by the director, but instead it is just merely a case of poor judgement and essentially ‘hoping for a good outcome.’


Who does the suspension of wrongful trading effect?

The wrongful trading provisions will be suspended for all companies, not just those that are directly affected by the COVID 19 pandemic.

The following rules still apply:

– Transactions which prejudice third parties are still intact, such as transactions which prefer one particular creditor over another, including transfers at an undervalue

– Directors must also avoid breaching their wider fiduciary duties to creditors

– The unlawful preference provisions under section 239 of the Insolvency Act 1986

– Any personal guarantees

On reflection, the suspension of wrongful trading will have directors sighing with relief especially those that are operating in the hospitality, tourism and events industry and with

the latest announcement on the tier system for England. The suspension of wrongful trading however does not affect directors wider liabilities, including fraudulent trading.

Peter Fisher, Lawyer at CP Law comments:

“whilst the latest suspension may be reassuring for directors, when companies do find themselves in a state of distress, facing financial difficulties, it is important to seek expert support and advice. At CP Law Associates we have an dedicated Insolvency department ready to assist directors seeking advice. ”

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