31 March 2020

The right to trade wrongfully

On Saturday evening, the Business Secretary, Alok Sharma MP, announced that, in order to support business, the government intends to suspend the wrongful trading provisions contained in insolvency legislation.

Those provisions are to be found in sections 214 and 246ZB of the Insolvency Act 1986. That legislation refers to insolvent winding up and insolvent administration of companies. In summary, it provides that once a director or directors of a company conclude (or should have concluded) that there is no reasonable prospect of that company avoiding an insolvent liquidation or insolvent administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors. If, after insolvent administration or winding up, it appears to the court that a director has failed to comply with this duty, the court can order the director to make such contribution to the company’s assets as the court thinks proper. This applies equally to shadow directors.

It is not yet clear how the government proposes to achieve this. Its aim in lifting a worry from directors' minds at a time when directors will be focused on the survival of companies is logical, and it is consistent with an approach that has largely been supportive to business (mindful of the wider consequences to individuals of businesses failing on a large scale).

However, directors (and others) should remain careful in dealing with creditors. The provisions regarding fraudulent trading found in sections 213 and 246ZA of the Insolvency Act 1986 will still, it appears, remain in force. That legislation also refers to insolvent winding up and insolvent administration of companies. In summary, the fraudulent trading legislation provides that if in the course of insolvent winding up or insolvent administration of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose then the court can again order directors to make such contribution to the company's assets as the court thinks proper. Those who are not directors are also covered if they were knowingly party to carrying on the business in that way. The standard for fraudulent trading is higher in that it involves intent. But anything involving dishonesty or knowledge of an attempt at fraud will certainly satisfy the fraudulent trading test. Separate legislation permitting the disqualification of delinquent directors will also remain in force.

As part of the measures announced on Saturday, the government also intends to take steps to ensure that companies in rescue or restructuring processes will be able to continue to obtain supplies and services. This appears to be based on proposals in the government's 2018 consultation on corporate insolvency for moratoria on enforcement for a period to allow restructuring and suspension of provisions in contracts that purport to allow termination of a contract because of an insolvency event such as administration. The importance of taking legal advice at an early stage if considering terminating a contract will be more important than ever.

We will continue to monitor for further detail. In the meantime, the press release from the Department for Business, Energy and Industrial Strategy can be found here.

The outcome of the 2018 consultation on corporate insolvency (with the relevant section at page 42 onwards) can be found here.

Bryan Shacklady is a Senior Solicitor in our Dispute Resolution team.

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