October 18, 2021
Under ss. 214 and 246ZB of the Insolvency Act 1986, where a director of a company knows, or ought to conclude that there is no reasonable prospect that the company will avoid going into insolvent liquidation or insolvent administration, he or she must take every step that a reasonably diligent person having both the knowledge, skill and experience that may reasonably be expected of a person carrying out the director’s functions, and the their own knowledge, skill, and experience, would take with a view to minimising the potential loss to the company’s creditors.
If the director fails to take such steps, and the company does go into insolvent liquidation or insolvent administration, then the director may be ordered to make such contribution to the company’s assets as the Court thinks proper, which is likely to equal to the amount that the director’s actions contributed to the company’s net balance sheet deficiency.
The law of wrongful trading, therefore, places a powerful incentive on directors who believe that their company is at risk of insolvency to cease trading. In the circumstances of the pandemic, however, that is exactly what the Government did not want them to do. That is why, on 26 June 2020, the Government suspended liability for wrongful trading from 1 March 2020 to 30 September 2020 (the “relevant period”). This was effected by s. 12 of the Corporate Insolvency and Governance Act 2020, which created a seemingly irrebuttable presumption that the director in question was not responsible for any worsening of the financial position of the company or its creditors that occurred during the relevant period.
Section 12 of CIGA 2020 expired on 30 September 2020, however, in light of the continuing effects of the pandemic, in November 2020, the Government issued The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349) (the “Wrongful Trading Regulation”), which once again suspended liability for wrongful trading, this time from 26 November 2020 to 30 April 2021.
In the event, even this extension was not sufficient, and so, on 26 March 2021, the Government issued The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021 (SI 2021/375), which amended the Wrongful Trading Regulation to extend the end date to 30 June 2021. This has proved to be the last extension. The result is that from 1 July 2021, directors may once again be held liable for wrongful trading.
Despite the end of the suspension to wrongful trading, certain questions remain. In particular:
- How, in practice, is the Court to determine whether worsening in the financial position of the company occurred during the relevant periods? There are likely to be formidable evidential difficulties, particularly where, as often happens, a claim does not come to trial until many years after the event. These difficulties will be particularly acute when it comes to determining the extent to which any worsening occurred in the period between the expiry of s. 12 of the CIGA 2020 on 30 September 2020 and the introduction of the Wrongful Trading Regulation on 26 November 2020.
- Will liquidators still be able to hold directors who are guilty of wrongful trading liable for losses occurring during the relevant periods under s. 212 IA 1986, on the basis that continuing to trade constituted a breach of that director’s duty to the company’s creditors in circumstances where the company was likely to become insolvent?
The answers to these questions will ultimately have to be resolved through case law.