The Institute of Directors (ioD) has welcomed the reinstatement of a key insolvency protection for company directors, the suspension of liability for so-called ‘wrongful trading’, through a statutory instrument laid before parliament.
In June, the Government introduced emergency coronavirus legislation to facilitate a time-limited suspension of director liability for ‘wrongful trading’ applying from 1 March to 30 September 2020.
Before the emergency measures were introduced, under the Insolvency Act 1986 the board of directors has a strict duty to announce a cessation of trading if the company is insolvent – or if insolvency cannot realistically be avoided in the near future.
In that situation, the 1986 Act requires a company to be placed into an insolvency procedure – such as administration or liquidation – in order to safeguard the interests of the company’s creditors. Under the 1986 Act, failure to do so carries the risk of personal liability to the company’s directors.
The suspension of wrongful trading, which will run until 30th April 2021, does not affect directors’ wider liabilities under company law, for instance around fraudulent trading.
Roger Barker, Director of Policy at the IoD, said “We’re delighted the Government has heeded the IoD’s call to reinstate this measure, which will provide crucial breathing space for company directors in the months ahead.”
“With restrictions expected to continue through to the Spring, there is very little clarity around businesses’ long term viability. This measure will give directors reassurance that they won’t be penalised for trying to see their organisations and staff through the crisis.’
“It’s welcome that the Business Department has been agile in responding to the concerns of directors. We will continue to press on key outstanding issues such as support for entrepreneurs and upgrades to the skills system.”