Early last week, the whole of the UK was placed into lockdown to help control the spread of COVID-19. Many businesses up and down the country were forced to close their doors, not knowing when or if they will be opening again.
Companies will face financial strain in the coming months, however the chancellor announced that a “package of measures” would be made available to assist businesses during this uncertain time. Many directors will be making the decision to take part in these schemes, and it is important that directors remember their legal duties, in order to protect themselves against personal liability.
Directors’ duties are set out in both the Company Act 2006 and the Insolvency act 1986. When a company is solvent a director is under a duty to act in the best interest of the company, but if the company becomes insolvent, there is a shift and a director should have the creditors interests as his/her paramount concern. Under section 214 of the Insolvency Act 1986, if the directors of a company continue to trade in circumstances where they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into administration or insolvent liquidation, then they may be liable for wrongful trading.
A company can establish whether or not it is solvent through two tests. The first being the cash flow test, this considers if the company can pay its debts when due. Alternatively, the balance sheet test looks at whether the value of the company’s assets is less than the amount of its liabilities, whilst taking into account its contingent and prospective liabilities.
There are steps that can be taken to protect against personal liability for wrongful trading, for example:
- Being aware of the company’s financial position – it is important to know the situation the company may be facing, particularly when considering taking on any Government help
- Hold regular board meetings – these can be held via video conference. Be sure to take detailed minutes of these meetings, and outline the rationale for any decisions made
- Take professional advice – speak to lawyers about any queries such as if your company is insolvent and you have concerns about breaching your duties
The Government’s proposed changes to insolvency legislation
The Government announced that new laws will be introduced to assist directors during these times. These include a moratorium on winding-up petitions against companies and suspending rules on wrongful trading in order to afford more protections for directors.
Many other countries that have been affected by COVID-19 have already began to make changes in this area. For example, the German Government has already introduced emergency laws to ban winding-up petitions.
By temporarily suspending rules regarding wrongful trading, the Government is attempting to allow directors to take the Government assistance that has been offered in the midst of COVID-19, without concerns of claims for wrongful trading. It is proposed that these laws will be applied retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going. Directors should however still be aware of their duties under the Companies Act 2006 and should seek advice from relevant professionals in any event.
The Government also plans to introduce a moratorium on enforcement action. This would allow a period of breathing space for businesses and protection from enforcement action by creditors.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.