12 August 2021: The above is not the snappiest of headlines but it does rather get to the point. Although certain emergency measures brought in by The Corporate Insolvency and Governance Act 2020 have been extended further, the suspension of wrongful trading provisions have not. Therefore, as of 1 July 2021, directors are once again at personal financial risk if they continue to trade an insolvent company.
The wrongful trading provisions are detailed within Section 214 of the Insolvency Act 1986. They state that ‘…the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper. This subsection applies [if]… that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’.
In a more digestible form; if the director is, or even ought to be, aware that the company is insolvent and will not recover solvency, then they will become personally liable for losses made from the point that they ought to have been aware of the insolvency.
To assist directors struggling during the pandemic the government suspended such provisions so that this particular additional millstone was not hanging from their necks. However, with the provision being back in play, directors must be very mindful of continuing to trade on if the pandemic has left their company insolvent.
In light of the above, if you or your clients, having reviewed cash flows and/or the company’s financial position are uncertain if a solvent future lies ahead, please do be careful if current plans hinge on optimism and an expectation that ‘everything will be ok once we’re back to normal’.
As always, here at BRI we consider ourselves an honest and helpful critical friend who will be happy to talk through any matters that may be troubling you or your clients regarding potential insolvency and its pitfalls. Please do pick up the phone if there are any concerns.