COVID-19: Company directors given breathing space

Currently, directors of limited liability companies can become personally liable for business debts, under the Insolvency Act 1986, if they continue to trade while unable to pay their debts (wrongful trading). There does not need to be any fraudulent intent, only poor judgment or wishful thinking.

Last week, however, the government announced a package of measures for businesses, including suspending wrongful trading provisions for three months, backdated to 1 March, to protect company directors from the threat of personal liability.

Other measures include enabling companies either to hold AGMs online or postpone the meetings, and granting a three-month extension to the filing of company accounts. Business Secretary Alok Sharma said the measures would give bosses ‘much-needed breathing space to keep their workers employed and their companies going’.

Jennifer Marshall, president of the Insolvency Lawyers Association, said: ‘Suspending wrongful trading, in particular, will assist directors in accessing government or bank funding without concerns regarding personal liability.’

Frances Coulson, senior partner and head of insolvency at Moon Beever, said: ‘Everyone is banging on about wrongful trading but no one has really mentioned sanctioning the ability to preferentially pay suppliers.

‘Bad directors often make preferential payments to keep certain suppliers sweet so they transfer over to a newco, dumping other creditors, particularly involuntary creditors such as utilities and local councils as well as HMRC (until this December when HMRC will become a preferential creditor again).’

Coulson said the ‘well-intentioned’ suspension ‘won’t rescue long term abusers of credit, but will help cover the instant crisis.

‘The changes also look as if they will allow preferential payments to suppliers, in order to enable continuation of trading. This needs to be carefully framed, as such preferences are often made solely to shift the business away from creditors rather than to keep the existing company going. Directors need a moratorium now for good reason but must not forget their statutory duties. Consultation with insolvency professionals now might save pain later.’