Directors running stressed businesses can still be prosecuted despite suspension of wrongful trading law

Despite the Government’s proposed suspension of the wrongful trading law last month, company directors of troubled businesses can still be pursued personally if they breach their duties to protect the interests of creditors such as suppliers and lenders.

Whilst the government announced the suspension of the wrongful trading* law to help businesses survive the coronavirus crisis, other laws that govern how directors of stressed businesses behave are still in place. Directors could face prosecution and / or personal liability if they break those laws.

Actions that are still breaches of directors’ duties include:

• Prioritising the interests of shareholders over creditors when insolvency is foreseeable
• Moving assets and liabilities to different companies within a group to ‘protect’ those assets from creditors
• Taking on additional credit in the knowledge that the company will not be able to repay it
• Giving preferential treatment to one creditor over another, by repaying them ahead of others or giving them security
• Selling assets at less than their value to shield them from creditors

The suspension of the wrongful trading law has led to some directors thinking that they have much more freedom to ignore creditors. That is not the case at all. Directors who fail to put creditors first when their company is heading towards insolvency are not going to be able to sidestep their duties. Coronavirus is not a legitimate excuse for breaking the law, and directors could face serious legal consequences.

The Insolvency Service, Administrators and Liquidators are still going to investigate and penalise directors who breach their duties. Directors are taking a big gamble if they think the consequences – which include claims against them personally, as well as potential fines and disqualifications – will not be as punitive as they have always been.

There are five key steps directors must take to avoid the risk of penalties if their company is facing coronavirus-driven cash flow problems and may become insolvent:

1. Monitor cash flow far more tightly than usual
2. Keep a written record of decisions made regarding creditors
3. Take professional advice as soon as possible if there is a risk of insolvency
4. Consider whether you should approach your creditors proactively to renegotiate payment terms
5. Don’t rush to liquidate your business too quickly – in some cases this can make your position worse as a director

* The wrongful trading law makes directors personally liable if they allow their company to continue business if they know it can’t avoid going insolvent. Directors found guilty could also be disqualified from acting as a director for up to 15 years and subject to steep fines & other penalties.

For more information on this update, please contact Frank Bouette, Principal in the Restructuring & Insolvency team at EMW.