Directors’ Duties following Coronavirus – where do you stand?

The UK’s business secretary has announced the Government’s proposed changes that it intends to make to the Insolvency Act 1986 (the “IA 1986”) in light of the Coronavirus pandemic. Christopher Buck, Associate Partner in the Business Services team here at Franklins explains the implications that these changes will have on directors at this difficult time.

One of the key changes that has been proposed by the Government is the suspension of the civil offence of wrongful trading under section 214 of the IA 1986.  It is an offence for a director to continue to trade if they have the knowledge that their business is experiencing financial difficulties which, more likely than not, will result in it becoming subject to insolvency proceedings. In such circumstances, the duty imposed on directors to act in the best interests of the company and its members as a whole becomes a duty that is owed to the company’s creditors.

Although there is no offence for trading while the company is insolvent, once it has become apparent that insolvency is looming, a director who fails to take steps to mitigate any losses to creditors faces the possibility of being held personally liable for wrongful trading. This can have costly implications as the directors will be liable to make a personal financial contribution to the company’s assets. Directors can still fall foul of wrongful trading even if their business is not trading, but losses to the company’s creditors continue to increase.

The Government’s proposed temporary suspension of this civil offence is to relieve the increasing pressure on directors to keep their businesses afloat in fear of becoming personally liable. That being said, the Government is keen to retain the existing legislative provisions that are currently in place for fraudulent trading and the threat of director disqualification in the hope that these alone will be effective in mitigating misconduct by directors.

This is not the only change that has been proposed by the Government. Other changes include a temporary moratorium for businesses that may be undertaking restructuring due to Coronavirus. The intention is this will provide an initial 28 days of protection, with the ability to extend by a further 28 days with the approval of an insolvency practitioner. It is proposed that these changes will apply retrospectively from the 1^st March 2020.

If you require any legal assistance with regards to understanding your duties as a director in light of Coronavirus, then please do not hesitate to contact Christopher Buck, on 01908 660966 / 01604 828282 or email christopher.buck@franklins-sols.co.uk.