COVID-19 and Directors Duties

The Government is proposing a relaxation of the rules surrounding wrongful trading as part of its package of measures to give companies that were viable before the COVID-19 outbreak a better chance of emerging intact following the immediate crisis.

What is wrongful trading?

This occurs when a company continues to trade whilst insolvent (i.e. it cannot pay its debts when they fall due). If wrongful trading is established, directors may face disqualification for up to a period of 15 years and/or be held personally responsible for the company’s liabilities regardless of there being no intent to defraud.

What do we currently know about the proposed amendments to the wrongful trading rules?

• details of the proposed amendments are yet to be announced;
• the amendments will apply retrospectively from 1 March 2020;
• the amendments will be temporary; and
• there will be no change to the existing rules relating to fraudulent trading, preferences, transactions at an undervalue, transactions defrauding creditors, misfeasance and the general duty to act in the best interests of creditors.

Practical tips

Once a company is in financial difficulty the fiduciary duties its directors owe to the company’s shareholders shift to stakeholders as whole, including the company’s creditors. Below are some practical tips to assist directors to operate within the scope of their duties:

• communicate regularly with the board and document decisions;
• keep cashflow under review;
• if the company is struggling to meet payment obligations try and negotiate alternative repayment terms with creditors as soon as possible;
• do not accumulate excessive NI, PAYE or VAT liabilities and ensure funds are set aside for them. If you are concerned about the company’s ability to meet its HMRC liabilities contact the HMRC helpline set up to assist businesses effected by COVID-19 to consider your options as soon as possible;
• do not take on any new lending unless you are confident the company can honour the repayment terms;
• treat creditors fairly. Do not prefer any creditor ahead of others unless deferred payment terms have been agreed;
• ensure any asset disposals are at arms-length, supported by professional valuations and all monies owed to the company are paid into its bank account as soon as possible;
• do not take on new work or accept deposits if you are aware that the company is unable to fulfil the work;
• do not authorise the company to pay directors unrealistically high salaries if you know the company cannot afford this; and
• do not declare dividends unless you are satisfied that the company has distributable profits and can continue to pay its debts after the payment of the dividend.

This is not an exhaustive list. Other advice may be required depending of the circumstances.

If you consider your company is in financial difficulty we can assist you to explore whether there is a reasonable prospect of avoiding insolvent liquidation or administration. If however this is unavoidable we can also provide advice to ensure you act in accordance with your duties before the company enters into a formal insolvency process.

If you would like to discuss any issue raised above please contact Jennifer Bean on 07880024461.