Suspension of director liability for wrongful trading

The Government has announced important changes to UK insolvency law that suspends director liability for wrongful trading.

Seeking to provide reassurance to business directors in light of the ongoing COVID-19 pandemic, the Government has retrospectively suspended restrictions around wrongful trading from the 1 March 2020 for three months

Under English law, where a company continues to trade, even in the face of unavoidable insolvency, the company’s directors can be found personally liable for the losses suffered to creditors as a result, potentially leading to a court-ordered contribution to the assets of the insolvent company.

By suspending the rules, directors of struggling business who continue to operate, in the full knowledge that they face the prospect of insolvency, will not be penalised for doing what they can to keep their business operational.

Business Secretary Alok Sharma announced the changes and said they would offer a ‘breathing space’ for companies undergoing a rescue or restructure process to help them avoid insolvency.

On top of this suspension, the Government will also introduce new emergency legislation that will:

• Create new restricting ‘tools’, including a moratorium, for companies giving them a holiday from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure.
• Introduce a new restructuring plan, that binds creditors to that plan;
• Allow companies to buy essential supplies while attempting a rescue or restructure.

The Government hopes that by taking these measures they can reduce the number of contract cancellations, supply chain issues and a wide range of other issues that are affecting the UK economy.