Global menu

Our global pages

Close

Coronavirus - Temporary amendments to Insolvency Law: suspension of liability for wrongful trading – UK/Northern Ireland

  • Ireland
  • Northern Ireland
  • General

29-05-2020

In the second of our series of articles on the much anticipated Corporate Insolvency and Governance Bill (the “Bill”), which will enact various new corporate restructuring tools well as make temporary changes to insolvency law as a result of the coronavirus, we focus on the temporary changes to the law regarding the suspension of liability for directors for wrongful trading during the coronavirus pandemic.

View our series of articles summarising the Bill:

View our article on restriction on statutory demands and winding-up petitions

View our article covering a summary of the Corporate Insolvency and Governance Bill

What is wrongful trading?

Wrongful trading refers to the trading of a company after the point at which the directors (i) knew (or ought to have concluded) that there was no reasonable prospect that the company would avoid insolvent liquidation or administration and (ii) did not then take every step with a view to minimising loss to the company’s creditors.  A subsequently appointed administrator or liquidator (or their assignee) may bring a claim for wrongful trading under article 178 of the Insolvency (Northern Ireland) Order 1989 (the “Order”) against its directors.

In considering whether the directors knew (or ought to have concluded) that there was no reasonable prospect of the company avoiding insolvent liquidation or administration, the court will assess the conduct of each director against both the subjective knowledge, experience and skill of that director and also the objective knowledge, experience and skill of a reasonable and competent director carrying out the same function in a similar company.  If the court concludes, on those bases, that the directors knew (or ought to have concluded) that the company could not survive, it will then consider whether they took every step to minimise loss to the company’s creditors. The requirement is not to take every reasonable step but absolutely every step that the directors could have taken.

If a director is held to be liable for wrongful trading, the court may order the director to make a contribution to the company’s assets.  The award is compensatory in nature and the court will determine any contribution by reference to the loss caused to creditors and each director’s conduct from the point in time at which the directors knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration.

Has liability for wrongful trading really been suspended?

Technically, liability for wrongful trading has not actually been suspended, but the risk of liability has been dramatically reduced by clause 11 of the Bill.

Technically, liability for wrongful trading has not actually been suspended, but the risk of liability has been dramatically reduced by clause 11 of the Bill.

By way of evidential presumption, the Bill reduces the risk of directors being ordered to contribute to the assets of a company in respect of the “worsening of the financial position of the company or its creditors” between 1 March 2020 and the later of 30 June 2020, or one month after the coming into force of the Bill (that is, the “coronavirus pandemic”).

What does this mean in practice?

Where a company is forced into insolvency proceedings as a result of the coronavirus pandemic, its directors may still be sued for wrongful trading under article 178 of the Order, if the criteria summarised above are met. However, in the event that a director is found liable for wrongful trading, the effect of the Bill is that, in considering what contribution (if any) the director should make to the company’s assets, the court will assume that the director was not responsible for any worsening of the financial position during the coronavirus pandemic, and disregard any losses incurred during that period.

The director may still be liable for wrongful trading committed before or after the period of suspension (i.e. 1 March 2020 to one month after the coming into force of the Bill). This means that the comfort which directors can draw from the suspension is limited. Not only do other risks of personal liability remain (as noted below), but also any director of a distressed company will need to consider very carefully whether the company has a realistic prospect of survival once the period of suspension comes to an end. If it does not have a realistic prospect of survival, and the director causes it to continue to trade, they will be at risk of liability for any loss that the company suffers after the end of the suspension period. As a result, the suspension could create a “cliff edge”, precipitating a spike of insolvencies when it ends.

What about other risks and liabilities?

Directors should bear in mind that, although they are very unlikely to be liable for wrongful trading in the coronavirus pandemic because of the Bill, all other sources of risk and liability under the Act are unaffected.

What should directors do?

While the Bill does make liability for directors for wrongful trading remote, directors are still best advised to consider their conduct during the coronavirus pandemic carefully, as all other sources of risk under the Order and the general law remain unaffected.

If directors are concerned that a company may be in or anticipating financial difficulty, regardless of the coronavirus pandemic, they should ensure that they take the interests of creditors into account in all the company’s decision-making, take every step to minimise potential loss, record all their decisions fully, in writing, and seek professional advice.

For further information, please contact:

Matthew Howse, Partner in our Dispute Resolution & Litigation department - matthewhowse@eversheds-sutherland.ie

Damian McElholm, Senior Associate in our Banking & Financial Services department - damianmcelholm@eversheds-sutherland.ie

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

< Go back

Print Friendly and PDF
Register to receive regular updates via email.