Updated: 6th January 2021
At the onset of the Covid-19 pandemic, Business Secretary, Alok Sharma, announced an unprecedented change to insolvency regulations to protect struggling businesses from the financial pressures presented by the coronavirus outbreak. As part of the announcement made on 28 March 2020, wrongful trading provisions were suspended retrospectively from 1 March and a moratorium placed on businesses underdoing a rescue process, allowing them to temporarily continue trading without the threat of creditor action and personal liability.
Wrongful trading provisions are part of the Insolvency Act 1986 which forces company directors to take the necessary steps, including insolvency procedures, to minimise losses and protect creditor interests in the event of serious financial difficulty. The two key areas which company directors should be aware of include wrongful trading and insolvent trading which can be separated by a subtle distinction.
Wrongful trading and insolvent trading differ from each other as wrongful trading is the act of an already insolvent business, however, insolvent trading means trading while being unable to fulfil liabilities which can be done unintentionally.
From a legal perspective, there are strict rules and regulations penalising company directors and businesses from wrongful trading. By continuing to trade without having the sufficient funds to repay debts, you are worsening the position of creditors which will be classed as a serious offence during an insolvency investigation.
The three-month moratorium gives businesses the breathing space to trade throughout the pandemic without the looming threat of committing a wrongful trading offence. Perfectly viable businesses which were financially healthy prior to Covid-19 may experience temporary financial struggles over the course of the pandemic. This moratorium provides a lifeline to businesses adversely affected by the virus outbreak, which would otherwise be performing strongly.
The three-month moratorium on wrongful trading was extended further until 30 September 2020 as the economy continues to recover, bracing a series of local lockdowns across the UK as the spread of the virus continues to increase in selected areas. The temporary suspension may be extended further to protect businesses from the financial pressures presented as a result of Covid-19, preventing otherwise viable businesses from being forced to take the insolvency route. The Corporate Insolvency and Governance Bill was made into legislation to allow for the suspension of liability.
If your business is insolvent and as a result, it is struggling to stay afloat due to poor cash flow and the inability to fulfil financial commitments, you cannot continue trading as this will lead to an Insolvency Service investigation and you will be in breach of wrongful trading rules. If wrongful trading can be proved, the company director can be held liable for trading wrongfully. If you do not hold the official title of director and you are acting as a director; you can still be held liable.
If your business is unable to recover from the financial consequences of Covid-19 and you are worried about trading after the moratorium on wrongful trading is lifted, seek professional advice. There are rescue measures which may reduce the financial burden on your business and restructure liabilities, including a Time to Pay arrangement, Company Voluntary Arrangement, Company Administration and raising finance.
If you are found guilty of wrongful trading, you could be held personally liable for the debts of the business, fined, disqualified as a company director and in a worst-case scenario – imprisoned.
If you are searching for routes to restructure your business to recover from the financial impact of the coronavirus pandemic, the Real Business Rescue partner-led team can help. We are UK’s leading business rescue and recovery firm, contact a member of our reputable team for a free consultation.
13th October 2021
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