The Corporate Insolvency and Governance Act 2020, introduced in June this year allowed companies that encountered difficult trading conditions as a result of the COVID lockdown, the ability to pause on potential wrongful trading liability, and subsequent restrictions on business operations.
Wrongful trading occurs when directors continue to trade with the knowledge that their business was likely to become insolvent and enter administration, yet they continued to trade – thereby increasing the risk for current and future stakeholders. Should this occur during normal circumstances, the directors would be personally liable and face court action to force them to personally contribute to the company’s creditors. The June Act softened this serious consideration and provided some breathing space for directors grappling with COVID implications and possible risk to their families and themselves.
As of the 1st October, this safety-net is removed.
Therefore, directors must now consider the following questions:
- Should a reasonable director know that there is no realistic prospect of trading out of the situation? What evidence will liquidators/creditors use (i.e. creditor letters, accounts, etc.) to establish their low threshold for proof?
- If point 1 is true, has every possible step to minimise loss been taken? In court, the burden of proof falls on directors.
- If there is a belief amongst directors that profits will be achieved in the near-term, then it is important that evidence is available to support this belief.
- Have all creditors been subject to the same risk-mitigation? If trade creditors have been placated but not HMRC/landlords, then insolvency proceedings remain a risk.
- Should debt restructuring be considered and how should this be managed?
What should directors do?
- Set out all commercial steps taken since June (furlough, contracts, funding, government support, debt restructuring conversations, etc.) to establish whether or not point 1 is applicable.
- Speak to legal/accounting advisers to establish next-step strategies (including potential debt restructuring) in order to protect the company and its directors against insolvency and/or speculative or serious wrongful trading enquiries or accusations from creditors and to provide confidence to the creditor group as a whole.
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Should you have any questions or need help, please get in touch with your usual Rooney Nimmo contact or any of the persons below.
John Nimmo, Founding Partner
+44 (0)7811 458 506
Grant Docherty, Partner
+44 (0)7877 283 645
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