COVID-19: Relaxation of directors' duties

6 minute read
02 April 2020

The Government continues to develop its response to the COVID-19 pandemic. In this Insight we examine the weekend's announcement from the Business Secretary that provides some welcome good news for directors.

On 28 March 2020, the Business Secretary, Alok Sharma announced plans to:

  • amend insolvency law to allow companies to keep trading while they explore options for rescue; and
  • temporarily suspend wrongful trading provisions retrospectively from 1 March 2020 for three months.

This is undoubtedly good news for directors who are having to respond to the fast moving challenges posed by the COVID-19 pandemic whilst continuing to meet their legal duties. However, the changes cannot be implemented immediately and therefore directors are not yet off the hook that could lead to personal liability if a company trades whilst insolvent and the company ends up in a formal insolvency process.

So, to what extent does this announcement give directors the breathing space that they need to keep business going and preserve jobs? We explore the answers below.

What changes are expected?

The Government previously consulted on changes to the corporate insolvency regime and announced plans to introduce new insolvency restructuring procedures in August 2018. Notes to the latest announcement state that the new legislation will implement these plans and include:

  • a moratorium for companies to provide breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
  • protection of supplies to enable a company to continue trading during the moratorium;
  • safeguards for creditors and suppliers to ensure they are paid while a solution is sought;
  • a new restructuring plan, binding creditors to that plan;
  • a temporary suspension of the wrongful trading provisions retrospectively from 1 March 2020 for three months; and
  • provisions to enable the changes to be extended, if necessary.

It appears from the announcement that the suspension of wrongful trading provisions will apply to the directors of any company and there is no suggestion that businesses will be required to demonstrate a causal link between the current crisis and their potential or actual insolvency. However, directors should to bear in mind that the wrongful trading provisions will be reinstated once the suspension is lifted (which, at the time of writing, is due to take place on 31 May 2020) and so it should not be relied on as a permanent solution where there are other substantive issues affecting a business.

The announcement notes that the required legislation will be introduced to Parliament at the earliest opportunity and the detail of that legislation is awaited. Given that Parliament is in recess until 21 April 2020, where does that leave directors in the interim period?

What should directors do while they wait for the change to take effect?

In our previous insight on Directors' duties in testing times we gave some practical tips on how to respond to the challenges posed by the COVID-19 pandemic. These recommendations continue to apply. It is still critical to maintain active management of creditors and stakeholders and practice good discipline in holding meetings of the board of directors to discuss the financial and trading position of the company. This is not least because a number of existing measures will, it appears from the announcement, continue to apply even after the proposed legislation is passed:

  1. fraudulent trading - if a company continues to trade with the intent to defraud its creditors, any other person or for any fraudulent purpose, the directors (or any other person knowingly party to the carrying on of the business in such manner) can be made personally liable to contribute to the company's assets;
  2. director disqualification - a director can find himself disqualified if he engages in conduct which makes him unfit to be concerned in the management of a company; and
  3. misfeasance provisions - a director can be subject to proceedings brought by a liquidator for, amongst other things, misapplication of company property or a breach of fiduciary or other duty.

Importantly, as is currently the case, directors of insolvent companies or those trading in the "wrongful trading zone" will, despite the proposed changes, continue to owe their primary duties to their company's creditors as opposed to its shareholders. Accordingly, clear evidence of the rationale for making decisions with those duties in mind, and the taking of professional advice, will continue to be key and as relevant as before.

The rapid implementation of the new insolvency restructuring procedures, that have been waiting in the side-lines for almost two years, and the temporary suspension of the wrongful trading provisions is consistent with other swiftly implemented initiatives to support business during the pandemic, such as Government sponsored financial support. Collectively, they give credence to the Government's repeated assertion that they will do 'whatever it takes' to get the UK through the COVID-19 crisis. Whilst each company is different and will need to continue to monitor its own potential for continued trading, it is hoped that directors of otherwise successful companies can take confidence that a package of options and support is emerging that will increase the chance that their businesses can be given the breathing space to adapt and continue.

We have put together a summary of UK Government funding measures to address the COVID-19 crisis and a COVID-19 online resource hub to help you manage the challenges and mitigate the risks for your business.

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