The Corporate Insolvency and Governance Act (“CIGA”) came into force on 26 June 2020 introducing a number of reforms aimed at providing protection to directors and companies in financial distress, particularly as a result of the COVID-19 pandemic.
The fact that the provisions relating to suspension of liability for wrongful trading ended on 30 September 2020 (and it has not been extended), presents a number of potential problems to directors during this unprecedented financial climate. Directors will again be at risk of personal liability for any wrongful trading claims for the worsening of the company or creditors’ financial position from 1 October 2020.
Directors should not delay in seeking legal advice, especially in light of the changes brought by Corporate Insolvency and Governance Act.
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What is wrongful trading?
Under current legislation, a director can be liable for wrongful trading if they are found to have continued trading a business and failed to minimise losses to creditors at a time when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration.
Can directors be personally liable for wrongful trading?
Imposing personal liability on directors of insolvent companies that continued trading beyond a time at which there was no reasonable prospect of the company avoiding insolvency provides creditors with a certain degree of protection.
Has the suspension of liability on wrongful trading ended?
The recent suspension of wrongful trading was designed to ease the pressure on directors running their businesses by removing the spectre of personal liability for continuing to trade whilst the business may technically be insolvent. From 1 October 2020, Directors are again at risk of personal liability for any wrongful trading claims for the worsening of the company or creditors’ financial position.
What are Directors’ duties?
Chapter 2 of the Companies Act 2006 sets out duties owed by directors to a company including:
- a duty to act in accordance with the constitution of the company and to use powers only for the purposes for which they were conferred;
- a duty to promote the success of the company for the benefit of the members;
- a duty to exercise reasonable care, skill and diligence;
- a duty to exercise independent judgment;
- a duty to avoid conflicts of interest;
- a duty not to accept benefits from third parties; and
- a duty to declare to the other directors any interest that a director has in any proposed transaction or arrangement with the company.
What happens if a director breaches duties?
There is always a risk that if a Director fails to meet their duties, they may be subject to director’s disqualification, more details of which can be found here.
What are directors’ duties during insolvency?
When a company is insolvent or likely to become insolvent the directors’ duties change and they will be required to act in the best interests of the company’s creditors. These duties include avoiding preferential treatment towards a particular creditor (for example repaying a director’s loan), transferring the company’s assets at an undervalue and giving a connected party security over company assets due to historic reasons.
Do the insolvency law reforms change directors’ duties?
Directors duties are likely to remain unchanged by the proposed insolvency law reforms and it is important to note that the suspension of wrongful trading will not suspend other claims which can render directors personally liable such as:
- Fraudulent Trading: if a company continues to trade with the intent to defraud its creditors, the directors (or any other person knowingly party to the carrying on of the business in such manner) can be made personally liable to contribute to the company’s assets;
- Misfeasance: a director may be subject to proceedings brought by a liquidator for breach of fiduciary misapplication of company property;
- Director Disqualification: A director may find himself disqualified if proceedings are brought by the Secretary of State for Business, Innovation & Skills or, usually in compulsory winding-up cases, by the Official Receiver at the direction of the Secretary of State; and
- Breach of duties set out in the Companies Act 2006.
What should directors do during COVID-19?
- Stay up to date with government guidance on COVID-19 and any measures introduced for companies.
- All directors of the company should have access to the relevant financial information to be able to make collaborative, informed decisions.
- It may be helpful for directors to meet regularly (via teleconferencing or video conferencing) to discuss the status of the business.
- Look out for and effectively manage contractual, operational and insolvency risks in the business.
- Directors should ensure their decisions and the factors considered in their decision making are well documented i.e. board minutes and resolutions even where meetings have been held over video conferencing due to present circumstances.
- It is important to also seek legal advice from professionals to assist you throughout this time and in any decisions concerning the company.
- Seek advice from accountants, legal advisers and insurers in light of the present circumstances.
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