From 1 March 2020 directors could knowingly trade and make losses without concern that an Insolvency Practitioner would pursue them for wrongful trading whilst the provisions were suspended.
Taking a step back: Temporary suspension of wrongful trading provisions in a nutshell
Wrongful trading: When the directors of a company continue to trade a company past the point when there is no reasonable prospect of avoiding insolvent liquidation
To help businesses combat the financial impact of COVID-19, the UK Government announced a swathe of unprecedented measures intent on protecting businesses to better facilitate economic stability.
One measure that was introduced to help companies trade through financial distress as a direct impact of loss of business due to the pandemic, was a temporary suspension of the wrongful trading provisions. A temporary relaxation of formal Insolvency law, the measure was welcomed by insolvency professionals and business owners alike.
Forming part of a wider risk-avoidance strategy to help directors navigate the crisis, it gave otherwise viable businesses greater protection and provided much needed breathing space whilst further provisions were made, and recovery plans devised.
But as with many of the Government’s temporary measures, the provision has now been lifted, creating a heightened risk for some directors
The Insolvency Service has now confirmed the end of the temporary suspension period, and that normal trading regulations are to be reinstated.
This means that should directors knowingly trade and worsen the position for creditors from 30th September 2020 onwards, or continue to trade a business with no reasonable prospect of avoiding insolvency then they may be exposed to a potential claim against them personally.
Michael Roome, Partner within Smith Cooper’s Business Recovery and Insolvency division comments:
“Many of the measures announced by the Government in early Spring focussed on protecting businesses from the financial impact of government-imposed lockdowns, which may have pushed viable businesses into formal insolvency procedures. And whilst these measures were vital in assuring continuity for many businesses, they inevitably cannot last forever. It’s now paramount that business owners understand the potential impact that inaction may have on them and their business. It would therefore be prudent for directors to assess their position at this point, consider whether they will be able to continue trading into October 2020 and beyond, and begin taking the necessary steps now to protect their position.”
If you are a business owner or individual facing financial pressures, please do not hesitate to get in touch with a member of our dedicated Business Recovery and Insolvency team. Where required, our initial advice is provided free of charge, and can be given either face to face, by phone or by video call.