• For directors of companies facing financial difficulties, the wrongful trading regime can be front of mind, given the exposure to risk of personal liability.
  •  The regime requires directors to judge whether there is a reasonable prospect of the company avoiding insolvent liquidation, or insolvent administration (i.e. where the company’s assets are insufficient to meet its liabilities).
  • There is great uncertainty as to the duration of the current government-imposed restrictions, whether they will ease or become more stringent, and what the effects will be on the economy. This means that it can be extremely challenging for directors to identify what they are bridging to, let alone to assess whether that is something that will deliver a solvent outcome and it is achievable, in order for them to assess whether the “reasonable prospect” test is met. Directors do also have to take into account the risk of increased loss to creditors of prematurely putting the company into administration or liquidation, compared to not doing so. The options available to administrators and liquidators will be similarly limited, there will be increased costs and the insolvency processes, once commenced, are difficult to come out of.
  • To reduce directors’ anxieties and uncertainties, in some jurisdictions with similar regimes, governments have intervened to suspend the more stringent elements of it. For example, the German government has announced its intention to suspend the obligation to file, and the Australian government has announced a series of similar measures, including a moratorium on personal liability for insolvent trading. The Insolvency Service is likely to be looking at options and it is hoped that proposals will be made with similar intended effects. 
  • In the meantime if directors have serious doubt as to whether the company passes the “reasonable prospects” test, they should bear in mind the wrongful trading “safe harbour”, which protects directors from liability where they take every step with a view to minimising the potential loss to the company’s creditors. This could include:
    •  Taking out all unnecessary costs
    • Not taking on new or additional credit
    • Using all the special levers provided by the government e.g. HMRC time to pay, government loans, employee support.
  • Wrongful trading is always assessed with the benefit of hindsight and therefore it is important for the directors to take professional advice and ensure that their decision-making is carefully minuted.

Note: On 28 March 2020, the UK government announced a temporary suspension of the wrongful trading regime with retrospective effect from 1 March 2020. For further information please see Proposed changes to the UK Insolvency Framework and the temporary suspension of wrongful trading

This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.