Updated: 6th January 2021
On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.
One of the changes to the insolvency legislation introduced in October 2015 is an extension to the powers of administrators during an insolvency process. As a director, this change could affect the outcome for you on a personal level, potentially involving liability for company debt.
The Small Business, Enterprise and Employment Act (SBEE) has effectively increased your risk as a director should the company begin to struggle financially, and one of the areas of change involves the power held by an administrator.
Before the new legislation came into force, only liquidators had the power to take action against directors for wrongful or unlawful trading. Previously, a failing company had to enter voluntary liquidation before such an action could be brought, with only the liquidator having the power to initiate the process.
The Small Business, Enterprise and Employment Act now gives administrators the same power, which significantly increases your risk of director disqualification and personal liability.
Wrongful trading indicates serious mismanagement of an insolvent company, but without the specific intent to defraud. A misguided belief that trading out of insolvency is the best solution, sometimes leads directors to carry on in business when in reality trading should have ceased immediately.
It’s not always the case that a director benefits personally from these actions – when an asset or cash has been withdrawn from the company, for example, or sold under market value. You simply tried to keep the company going at all costs, and were reluctant to admit defeat.
By law, however, you’re required to place creditor interests to the fore, and cease trading as soon as you suspect that the company is insolvent. Claiming lack of awareness isn’t a defence because, as a director, you have a duty to know and understand your company’s financial position at all times.
When bringing a claim of wrongful trading, an administrator will have looked at the following areas:
All of these instances could indicate a ‘bury your head in the sand’ approach or simple lack of care, but as a director you’re duty-bound to manage the business effectively and be aware of its trading and financial position.
Unlawful trading differs because in these cases, wilfully defrauding certain parties is suspected. Non-payment of staff salaries, supplier invoices, and statutory tax obligations when continuing to take a salary or trade ‘normally’ will likely result in this allegation once the company’s financial position is known.
The penalties for unlawful trading include fines and personal liability for company debts. The courts take a serious view of unlawful trading, and imprisonment is also a possibility if proven.
The burden of proof is understandably greater than that needed for wrongful trading. The stakes are higher for both the administrator and yourself as a director, and in general, accusations are not made lightly.
The administrator needs to prove that you were fully aware of your actions. A pre pack sale in administration would come under particular scrutiny, for example, if there was a suspicion that existing directors purchased the underlying business assets purely with a view to setting aside existing debts, or if a transaction had taken place below the expected market value.
The fact that an administrator can now bring a case of unlawful trading, based on what is discovered during the insolvency process, leaves you at serious risk as a director if anything untoward has already taken place.
Simply being aware of how the business is performing on a day-to-day level is one of the best ways to reduce your risk. Knowledge of the company’s financial position is a fundamental responsibility of every director, as is seeking professional advice and guidance on how to proceed.
At some point you may need proof that you’ve tried to minimise losses for company creditors, and this will form a large part of your defence if any allegations are made.
Real Business Rescue provides professional advice on director responsibilities, and the powers of administrators in insolvency. Call one of our expert team to arrange a free initial consultation. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 101 UK offices or a place of your convenience.
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