COVID-19: Suspension of Wrongful Trading Rules

The Government has announced a temporary suspension of the law on wrongful trading, removing one potential way in which directors may incur personal liability if their companies seek to continue trading during the disruption caused by the COVID-19 pandemic.

With retrospective effect from 1 March 2020 and for a period of at least three months, the wrongful trading rules under the Insolvency Act 1986 will be suspended. Under these rules, the directors of a company could be found personally liable for its debts if they knew (or ought to have concluded) that there was no reasonable prospect of the company avoiding insolvent liquidation or administration and continued to allow the company to trade.

Although details are awaited in the legislation to enact the suspension, which will be introduced “at the earliest opportunity”, the move should encourage directors to avoid commencing insolvency procedures prematurely out of fear of wrongful trading claims in the current turbulence.

However the Business Secretary, Alok Sharma, cautioned that all other checks and balances to ensure that directors continue to fulfil their legal duties and obligations will remain in force. For general guidance on certain key duties and obligations, please see our recent article on director responsibilities.