The Covid-19 related suspension of Wrongful Trading Provisions ended on 30th June 2021, however the related business difficulties are still with us.
The temporary suspension of Wrongful Trading Provisions ended on 30th June 2021. The measure was intended to help company directors affected by Covid-19 keep their businesses going without the threat of personal liability. Most commentators agree that the suspension was a welcome move during what was an intensely difficult and uncertain time for businesses. The problems caused by Covid-19 however did not stop on 30th June, and thousands of businesses remain financially challenged by the consequences of the pandemic on their trading. In this article, we highlight the steps businesses should take to minimise the risk of Wrongful Trading and Personal Liability. This is not an exhaustive list but would be a good starting point.
What is Wrongful Trading?
Wrongful Trading, as set out in section 214 of the Insolvency Act, 1986, occurs when companies continue to carry on trading when they are insolvent – defined as being unable to pay their debts when they fall due. The Insolvency Act made it an offence for a company to continue to trade if the directors were aware that their business was unavoidably heading towards liquidation.
As a result of Covid-19 many thousands of businesses, through no fault of their own, have experienced significant financial difficulties. The suspension of Wrongful Trading meant that such companies could continue to trade and pay their staff and suppliers even if there were concerns that insolvency was looming, giving them breathing space to avoid insolvency.
What steps can directors take to avoid Wrongful Trading and Personal Liability?
Now that the suspension has ended, directors of companies who believe they might be heading for insolvency should consider taking the following steps to minimise the loss to creditors and therefore mitigate the risk of Wrongful Trading and Personal Liability.
- Maintain detailed financial forecasts. This will allow the financial position and viability of the business to be accurately and constantly evaluated, helping potential liquidity issues to be identified and will help to ensure that no creditors are given preferential treatment.
- Hold regular board meetings. Detailed records of board decisions should be kept, along with an analysis of the company’s finances and an explanation as to why a decision to continue to trade was made.
- Seek professional advice early. If the company is in financial difficulty, the sooner professional advice is sought, the better. If there is no reasonable prospect that a company can avoid insolvent liquidation or administration, directors should take advice from an Insolvency Practitioner who can advise on the best process for the company.
Talk to us if you are worried about Wrongful Trading
Given the financial shock that the pandemic has caused many thousands of businesses to suffer, and the fact the suspension of Wrongful Trading ended some time ago (even though the pandemic is not over), it is likely that we will see an rise in wrongful trading actions.
If you are concerned about the financial position of your company and are worried about Wrongful Trading, please contact us or contact one of our offices for an initial free of charge, confidential and no obligation discussion.
tel: 01202 923009