We are in very difficult times, where I suspect many companies are insolvent on a cash flow basis, unable to pay their suppliers on time.
Although the government are intending to bring in a law to relax the rules over wrongful trading, the detail hasn’t been seen so right now as I write this, 31 March 2020, so the current rules apply.
What are the current rules?
- Directors (and this includes Shadow and ‘de facto’ directors) must exercise reasonable skill and care in the management of their company’s affairs.
- When the company is solvent, the directors must act in the best interests of the company and its shareholders.
- When the company becomes insolvent, the directors’ duties shift, they must act in the best interests of the creditors.
Insolvency can be on a cash flow basis – where the company can’t pay its debts as they fall due eg suppliers – or a balance sheet basis – where the liabilities, including contingent and prospective liabilities, exceed the value of the assets. Note that where groups are involved, each company must be considered separately because the directors’ duties are owed to each individual company/its creditors, and not to the group as a whole.
Wrongful trading
Directors’ potential personal exposure for wrongful trading has historically been one of the main drivers encouraging the early placing of companies into administration or liquidation.
The government announced a few days ago it would relax the rules, but has this announcement given directors a ‘get out of jail free card’ to do as they want? The answer is no.
So why is that?
The relaxation of personal liability for wrongful trading will only be linked to the direct impact of COVID-19 – if there are other or historic issues giving rise to potential wrongful trading exposure, the relaxation of rules will not let the directors off the hook.
And
Directors are still at risk under a myriad of other provisions generally and under the Insolvency Act, including misfeasance, preference, transactions at an undervalue, fraudulent trading, etc – the relaxation of wrongful trading provisions is only one aspect of the insolvency laws directors should be mindful of.
So what do you do?
To reduce the risk of you being held personally liable and minimise potential creditor losses, you should:
- Prioritise cash flow, carry out a root and branch review of operations, to include assessing staffing levels and all expenditure
- Treat all creditors equally unless there is good reason for treating one better than others – eg urgent supplies which could stop the business trading.
- Keep your accounts up to date. Prepare appropriate financial and operational information and report it to the directors regularly.
- The directors should meet regularly, formally and informally. Minute the formal meetings.
- Seek the right advice at the right time. This might be from your lawyer, accountant, and/or an insolvency practitioner depending on the company’s circumstances. And follow that advice – the courts will probably look favourably on directors who took and followed the right advice at the right time. Think about having that advice being formalised in terms of a proper letter of engagement and committed to paper/email.
- Carefully consider all transactions – payments, contracts etc – in the light of the company’s financial position. Keep a contemporaneous record of the major decisions you make, setting out the financial position, your options, the decision you made and why.
- Recognise that groups bring added complications – conflicts of interest can arise. Work through and don’t ignore them.
- Communicate, communicate, and communicate again … with funders, your main suppliers and customers. Ensure there are no surprises. Work with and not against them. Look for innovative ways around problems – these times call for new and innovative solutions outside of the box.
Here’s a link (added 23 April 2020) to Maitland Chambers’ article ‘Wrongful Trading Suspension: Does it create a false sense of security? Worth a read.
Is there anything else you need to know?
Winding up petitions
Winding up petitions, especially those from HMRC, are often issued in the Insolvency and Companies Court in London. It has just adjourned all winding up petitions that are in the system to a series of dates from 17 June 2020. There will then be a backlog. There are all sorts of implications of this that directors will need to be mindful of whether or not they have an outstanding petition currently or not.
More changes coming to insolvency legislation?
I think it likely that the government will change insolvency law such as to compromise the ability of creditors to issue a winding up petition – this is already happening in Europe, so I expect it here within the next few weeks.
I expect a 90 day moratorium to be introduced prevent creditors like HMRC from issuing winding up petitions where the company is struggling directly – and only – as a result of COVID-19.
As and when (or if) such a new law is implemented, this will change the relationship between every creditor, including HMRC and suppliers, and the company.
All in all, there are even more choppy and uncertain waters ahead which in many instances only a good sailor will navigate.
Paul Brindley 31 March 2020
Update 11 May 2020: –
The government have still not issued the legislation regarding wrongful trading nor the stopping of winding up petitions. This was expected in the last week of April, we are now virtually in Mid May and we still have not seen the detail. There’s a reason for this, I believe, and that’s because the legislation could be very complicated. I’m expecting it to be one of two things and nothing inbetween – very complicated or very simple/broad brush.
This morning an article came out from a firm of lawyers on the approach a court took very recently where it refused to stop a petition in its tracks because it seemed clear to the court that the ability to stop petitions was likely to be limited to certain specified sectors of the economy and to statutory demands and petitions based on claims by landlords for rent arrears – here’s a link to the lawyer’s article, it’s worth a read.