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Corporate Insolvency and Governance Bill - wrongful trading

View profile for Stephen Downie
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The new Corporate Insolvency and Governance Bill enables a company to stay winding-up proceedings and further limits, in certain circumstances, the risk to directors personally that they may one day be accused of wrongful trading.

While Rishi Sumak initially extended this proposal for only three months from 1 March 2020, it has now been extended by four months, ending 30 June 2020 (although this may yet be further extended).

At the same time, winding-up petitions may be temporarily stayed to enable companies to restructure or recover and make arrangements to pay creditor liabilities.  This provides an initial impression that the cumulation of these steps means that companies in the UK are able to be run carelessly, without any consideration of creditor interests and without consequence of avoiding the obligation on directors to place their company into insolvency.

However, this detriment is more limited as, legally, the two do not overlap.  Wrongful trading (under the insolvency legislation) is only prohibited for the trading period before “commencement of winding-up” - which is the period before a winding-up petition is presented at court (as defined by Section 129 of the Insolvency Act 1986).

Claims for wrongful trading can still be brought against directors for numerous other reasons and indeed this suspension does not mean that directors do not have to comply with their ordinary legal duties (which can be found under Sections 171 – 177 of the Companies Act 2006 – commonly known as “fiduciary duties”). 

However, it does provide more breathing space to companies and their directors which, for many small companies, may only have continued to trade if they did not become personally liable for any such losses to creditors as a result of any such decision made recklessly.

However, it remains the case that where a director makes a decision unreasonably he will still be liable for a breach of his fiduciary duties

Ultimately, these changes do little to protect directors from personal liability arising from a wrongful trading claim.

If you require any guidance on the Corporate Insolvency and Governance Bill, please do not hesitate to get in touch.