Retrospective changes introduced by the Corporate Insolvency and Governance Act 2020 to the wrongful trading regime to mitigate the impact of the Coronavirus (COVID-19) pandemic.
On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (“the 2020 Act”) finally entered into force. Since then Simon Newman and Christopher Pask of 1 Chancery Lane’s Property, Chancery and Commercial team have been offering their views on its provisions and their impact over a series of updates.
In this update, Simon Newman addresses the retrospective suspension by the 2020 Act of the wrongful trading provisions in the Insolvency Act 1986 (“the 1986 Act”). Notwithstanding that the suspension of wrongful trading provisions applies retrospectively; the impact, in the sense of matters coming before the courts is unlikely to be seen for some time. That time will be once the anticipated high volume of business failures materialises, and insolvency practitioners begin looking at what potential claims they have against Directors. As such, this topic is the last in these series of updates which have previously covered the more immediate issues of the prohibition of pursuing debts through the statutory demand and winding up process; the introduction of the moratorium procedure; and the statutory over-ride of insolvency termination clauses in contracts for the supply of goods and services.
Wrongful Trading under the 1986 Act
These provisions enable an office holder to seek a declaration that a director or former director is personally liable to make a contribution to the company’s assets, where they have continued to trade in circumstances where there is no reasonable prospect of avoiding insolvency and have not taken every step to minimise potential losses to creditors.
Generally, on such an application the court will determine when the director became or ought to have become aware that there was no reasonable prospect of avoiding insolvency; and will then look to assess the worsening of the Company’s position since then. Typically, a director will not be required to contribute more than the amount that the company’s financial position has worsened as a result of the conduct.
Changes under the 2020 Act
Section 12 of the 2020 Act addresses the wrongful trading provisions of the 1986 Act and the applicability of those provisions in light of the impact of Coronavirus. Section 12 does not seek to amend the provisions of ss.214 or 246ZB of the 1986 Act, or switch them off entirely. Instead, section 12 introduces an assumption that the director is not responsible for any worsening of the financial position of a company or its creditor during the relevant coronavirus period of 1 March 2020 to 30 September 2020. These changes have been referred to as ‘suspending’ the wrongful trading regime and reflect similar measures adopted in other jurisdictions including Australia and Singapore. Significantly, some would say surprisingly, there is no requirement to show that the company’s worsening financial position was due to the coronavirus pandemic.
The motivation behind these provisions is to encourage Directors who had otherwise viable businesses, to seek to trade out of the Coronavirus pandemic and the difficulty it causes. It does so by reducing their exposure to personal liability that would otherwise require a more conservative approach which places creditors at the forefront of considerations. The broader intention of the government of introducing this relaxation is to facilitate the continued trading of companies and thus the preservation of jobs.
In a nod to their importance to the national and global financial systems, and the stricter approach to risk management to which they are subject; the changes introduced by the 2020 Act are not available to the directors of financial services firms, including insurers, banks and parties to capital market arrangements, or any other company that carries on regulated activities under the Financial Services and Markets Act 2000.
Considerations for Directors
It appears unlikely that directors will be liable under the wrongful trading provisions of the 1986 Act to contribute to the Company’s assets for action taken in the 1 March to 30 September 2020 period. That does not mean that a director will not be liable if their conduct has worsened the Company’s position outside that period. Also, as always with the legal system in England and Wales, further guidance on how this will operate and when this general position will not apply will arise as the courts grapple with the issue and interpret the legislative intention. In particular this might lead to fertile ground for the courts to consider the position when steps were taken in the window to which the 2020 Act applies, but continue outside that; and where directors have acted with a more flagrant disregard than might be expected of an attempt to trade out of the difficulties with office holders seeking to argue that the presumption introduced must be rebuttable. At this point in time however, these provisions of the 2020 Act have not troubled the courts and there is little other guidance.
Aside from the specific changes under the 2020 Act, directors’ duties and responsibilities remain unaffected. As such liability for misfeasance and the common law duty owed to the Company to act in the best interests of its creditors if the company is insolvent or likely to become insolvent remain.
Directors should also be aware that the changes under the 2020 Act have no impact on the fraudulent trading provisions under the s.213 and 246ZA of the 1986 Act, or the directors disqualification regime under the Company Directors Disqualification Act 1986.
Prudent directors should continue to err on the side of caution; where difficulties are closely related to the coronavirus pandemic and the prospect of a return to financial health exists, the changes under the 2020 Act will offer directors some breathing space and provide encouragement to persevere with trading in circumstances where, in normal times, that may not be a proper option.
For Company directors seeking to better understand the impact these changes might have on the decisions then need to take in the running of their business, or for office holders reviewing the conduct of former Directors, 1 Chancery Lane’s Commercial, Chancery and Property group can be contacted here for assistance.
Articles in this series: