Published: 27/09/2020 By Jane PriceWe are all guilty at times of thinking “what about me?” it’s human nature.
As an owner of a struggling business there is always concern (I hope, but depending upon your morals!) at the increasing debts owing to creditors. As an owner it really is vital that consideration is given to the situation as a whole. Sometimes the guilt of how your situation is or may affect other people (trade creditors, employees etc.) can lead to thinking “if I can just get through this bad patch…” What if you can’t though, what if the company was and has been insolvent for some time? You’ve done your best right?
Well not quite and nothing is simple. As a director, when a company becomes insolvent the director’s duties should focus on the creditors taking into consideration the risks of wrongful trading. It is an additional burden to add to the already considerable burden of simply running a business which is not easy at the best of times.
But what does this mean in a Covid-19 world because the Government said wrongful trading no longer applied? It will apply now. For most business owners, they had never come across wrongful trading or had much need to consider insolvency options. Through no fault of their own they have been confronted with challenges they did not deserve to have but that is where we are. The point to be aware of now is that wrongful trading did not apply until 30 September 2020 but it will do so after this date.
In a way it is a subtle change that may go under the headlines. It is dangerous to read too much into it but perhaps there is a message to take from it that the Government is here to support businesses where they can and have until now protected business owners completely to give them comfort to continue. However, it could be seen as a signal that the Government expect business owners to take back some of this responsibility.
Fraudulent trading under section 213 of the Insolvency Act 1986 would require an element of dishonesty on the part of the director or others. As a result, fraudulent trading should only really be a concern if a director has genuinely been dishonest. If you are reading this article and looking for advice then I suspect this is unlikely to apply to you.
Wrongful trading under section 214 of the Insolvency Act 1986 on the other hand casts a far wider net. The criteria here is simply “that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”. Once it became clear to the director that there was no longer a reasonable prospect that the company would avoid going into insolvent liquidation, that person must have taken every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken. The bench mark is that of a “reasonably diligent person”.
On the application of a liquidator the court may declare that that person is to be liable to make such contribution to the company’s assets as the court thinks proper.
Wrongful trading claims have historically been pretty rare and this re-introduction of the application of wrongful trading should not generate fear and mean that a business needs to cease trading immediately and close the doors. It is something to be aware of and consider going forward.
Taking advice and keeping a record of your decision making is key. Never before has the regular review of financial information been so important. This enables business owners to clearly understand their existing position and take steps to make changes where necessary.
The added benefit is that if business owners then need to consider restructuring options such as a Moratorium then it enables a quick turnaround of advice and for plans to be put in place immediately.
There are many excellent practitioners out there to support businesses in the accountancy, legal and insolvency sectors and if you need further advice please get in touch.
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