Covid-19 – the Government announces a temporary suspension of wrongful trading

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On 28 March, the UK Government announced a series of new measures to ease the unprecedented strain which coronavirus is placing on businesses across the country. Part of the package announced is that the wrongful trading provisions of the Insolvency Act 1986 will be suspended retrospectively from 1 March 2020. The Government has said that the purpose of this suspension is to allow directors extra security and certainty whilst they attempt to navigate the current climate and/or attempt a rescue of their companies. In particular the Government has highlighted the need for business to be able to “continue buying much-needed supplies such as energy, raw materials or broadband” which would ordinarily need to be carefully assessed in light of the wrongful trading provisions of the Insolvency Act 1986.

The UK Government’s announcement follows on from similar moves in Germany and Australia. In Germany, legislation has been passed which not only temporarily releases companies in financial distress from their obligations to file for insolvency but also suspends prohibitions of certain payments after the onset of insolvency. These provisions have been initially implemented until 30 September 2020. Similarly, the Federal Government of Australia has announced a six month softening of insolvency legislation which will allow directors to now incur debts “in the ordinary course of business” for which they would ordinarily be personally liable in an insolvency situation.

The initial response to the UK Government’s announcement has been largely positive. The British Chambers of Commerce have said that the suspension of wrongful trading will “ensure that directors are not penalised for doing all they can to save companies…that were viable before the outbreak… [that] can help power the recovery when the immediate crisis is over”. The move will also certainly be welcomed by the Institute of Directors who last week called on the Government to “prioritise jobs and business survival” by relaxing insolvency legislation to offer directors “greater room for manoeuvre” during the Covid-19 outbreak.

However, concerns have been raised that whilst the existing law on director’s duties will presumably remain in place in full, the measures implemented by the Government will have to be finely balanced to prevent unscrupulous directors from abusing the ability to trade without the risk of wrongful trading action being taken against them.

The legislation to back the Government’s announcement is currently awaited and will have to be closely assessed once it is published, though it is not clear when this will be. Walker Morris will continue to closely monitor this situation. In the meantime if you require advice or support then please contact one of our specialists.