Protection for directors as wrongful trading restrictions are lifted

News Article

Important changes to UK insolvency law have temporarily suspended director liability for wrongful trading.

News of this emergency legislation was announced by Business Secretary, Alok Sharma, back in March. However delays in the measures entering Statute, have resulted in the temporary three month suspension being extended retrospectively to four months – from 1 March until 30 June this year.

The Bill also provides the Secretary of State with the option to further extend the temporary measures by up to six months.

Luke Morgan, a Partner with Palmers who specialises in commercial debt, explained: “Under English law, where a company continues to trade, even in the face of unavoidable insolvency, the company’s directors are at risk of being found personally liable for the losses suffered to creditors as a result, potentially leading to a court-ordered contribution to the assets of the insolvent company.

“By suspending the rules, directors of struggling business who continue to operate, in the full knowledge that they face the prospect of insolvency, will not be penalised for doing what they can to keep their business operational doing extraordinary times. This may allow an opportunity for previously stable businesses to recover from the crisis without personal risk to the directors”

When Business Secretary, Alok Sharma, announced the changes he stated that they would offer a ‘breathing space’ for companies undergoing a rescue or restructure process to help them avoid insolvency.

In addition to this suspension, the Government is also introducing new emergency legislation that will:

  • Create new restricting ‘tools’, including a moratorium, for companies giving them a holiday from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure
  • Introduce a new restructuring plan, that binds creditors to that plan
  • Allow companies to buy essential supplies while attempting a rescue or restructure

Luke added: “The Government hopes that by taking these measures they can reduce the number of contract cancellations, supply chain issues and a wide range of other issues that are affecting the UK economy.

“However, when the temporary suspension of the wrongful trading regime ends, many directors will need to make some critical decisions.

“By taking action now, directors can put in place a strategic financial recovery plan for their business.”

If you are a business owner or supplier and you need help and advice on commercial finance issues, please contact us.

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