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Licence to trade wrongfully – false comfort for directors and LLP members?

31 Mar 2020

The government’s recent announcement of its intention to suspend the wrongful trading legislation for three months (from 1 March 2020) has been widely discussed. From the government’s point of view, no doubt it feels like a speedy and pragmatic response to the coronavirus outbreak, and a way to give the message to business that the government has our back and that we should not shut up shop for fear of trading wrongfully.
 
The wrongful trading provisions are designed to deter directors or LLP members from pushing on with their failing business in the blind hope that something might get better at some point, but in doing so, creating a net deficiency (eg. by incurring more credit) which is larger than the one which would have existed when it should have stopped trading. The director or LLP member can then become personally liable for any of the difference attributable  to the decision not to cease trading. Needless to say, the liability for wrongful trading only arises if the company or LLP ultimately goes into liquidation or administration.
 
There is nothing wrong with hope of course, but if it is not accompanied by a viable and credible plan to save the business, ideally professionally endorsed, it is not going to absolve a person of wrongful trading.
 
But who needs wrongful trading defences right now anyway, given the intention to suspend the provisions?
 
Directors and LLP members should be wary of this planned suspension of the wrongful trading provisions.
 

  • Firstly, it will not work (but no doubt will be tried on) as a smokescreen or excuse for businesses which should have ceased trading before 1 March 2020.  That said, it seems likely, but not certain, that any worsening of the net deficiency position accruing during the period of suspension, and as a consequence of the coronavirus, would be disregarded for the purposes of establishing the amount of a director’s or LLP member’s liability

 

  • Secondly, what about when the suspension is lifted? If the directors or LLP members have been trading the business ‘wrongfully’ right up until the lifting of the suspension, they may start to accrue potential personal liability immediately from then on. This prospect could see a wave of businesses being put into liquidation or administration very soon after the suspension is lifted: surely not the government’s intention!

 

  • Thirdly, as any insolvency practitioner or lawyer will tell you, actions for wrongful trading provisions are relatively rarely brought anyway. Actions under other provisions that can make directors and LLP members personally liable are much more widely deployed. These other actions – which remain unaffected, at least for now -  include those concerning undervalue transactions, preferential payments to creditors, and any other actions of the directors or LLP members which impact adversely on creditors and should not have been carried out.

 
If you’re looking for advice on this or any related matter, please do get in touch with Tim Symes.

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