Suspension of Wrongful Trading

Suspension of Wrongful Trading: Wrong Trade-off?

Suspension of Wrongful Trading: Wrong Trade-off?

Suspension of Wrongful Trading: Wrong Trade-off? The Government announced the suspension of the Wrongful Trading provisions with the following message on its website in a press release on 28 March 2020 – Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19:

…temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability

There appears little doubt that whether you support or dissent from the Government’s approach to tackling the Coronavirus that economic shockwaves are being felt. Just look at the High Street; the emptiness and absence of activity is there for all to witness when seeking to fill their shopping bag of essentials. Press reports are replete with suggestions that a substantial number of businesses will close which risks extending to a material proportion of the UK’s economy.

To address that position it appears the Government considers that suspension of Section 214 of the Insolvency Act 1986 (“Wrongful Trading“) will assist. Business Secretary Alok Sharma said:

Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.

However, how will suspension of Wrongful Trading provide a breathing space? It sounds positive and a useful suspension to deploy but on closer inspection can it work as it appears to have been publicly promoted? We are right to speculate about it because the Government was quick to make its seemingly opaque plans public but it seems arguably rather short on the specifics.

Please note the Disclaimer at the end of this post: “Suspension of Wrongful Trading: Wrong Trade-off?“.

What is Wrongful Trading?

Wrongful Trading, in a nutshell, amounts to the personal liability of a Director of a Limited Company which has continued trading causing further losses from a point in time when an insolvent liquidation had become unavoidable. A bit of a mouthful but in essence, it is about trading on and causing extra losses when you should have realised they would not be paid for.

It is far from a straightforward matter and when you consider the volume of wrongful trading claims actually issued by liquidators of insolvent companies, I would speculate that you may be surprised as to the amount of such claims populating the Court’s shelves.

In short, it appears to be an unfashionable claim to bring. It is considered expensive, difficult, risky and very time-consuming. Insolvency literature is replete with reference to it and whilst the consequential publicly reported court cases do ascertain considerable prominence, they do not appear as voluminous or as routine as claims for antecedent transactions, misfeasance and unlawful dividends.

With that in mind, it is perhaps remarkable that the Government has sought to focus on it given the extent of its reach relative to other more widely litigated liquidator claims. It appears to me to be a public relations proposition given many Directors may be aware of the existence of wrongful trading but perhaps not so aware of the number of such claims issued.

What is wrong with Wrongful Trading?

Wrongful Trading is not the same as obtaining credit by deception but a Director has a duty to creditors whilst promoting the company’s success. Section 172(3) of the Companies Act 2006 spells this out:


The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

Section 172(3) of the Companies Act 2006

Obtaining credit by deception takes many forms such as Fraudulent Trading which is set out in Section 213 of the Insolvency Act 1986. But this is not Wrongful Trading.

A distinction is that Wrongful Trading requires no finding of dishonesty but a reasonable Director in compliance with their Director Duties will not usually engage in such wrongful acts as Wrongful Trading.

The general issue at large as to what is the ‘wrong’ or what is wrong with Wrongful Trading, was notably promulgated by the late Gabriel Moss QC in Insolvency Intelligence in 2017 in his article “No compensation for wrongful trading – where did it all go wrong?

… directors should be deterred from causing debtor companies to take on liabilities which they have no reasonable prospect of paying. If that occurs, then subject to the statutory criteria for liability, compensation should be available for creditors whose debts have been wrongfully incurred

The Trade-Off

Does it not remain rather undesirable in continuing to trade for a company to accept credit and take on liabilities that they have no reasonable prospect of discharging, whenever such an event arises?

I cannot see any justification for a company shifting a loss onto another company save if indeed there has been full and frank disclosure of such a prospect arising and with prior agreement.

Of course, the company causing such a loss may well plead that there was never any intention to cause a loss but the requirement to avoid it however arises when someone ought to have known that it was an inevitability.

The Government says that it is looking to provide businesses with a breathing space to keep their employees and their companies going. Does that mean we should sanction wrongful acts?

Suspension of Wrongful Trading is conceivably undesirable because firstly, a wrongful act arguably should not be suspended – as a matter of principle. It may risk perception of affording a rogue trader the conceivable right to roam unchecked and unfettered – at least during the period of the suspension. What message does it send out to Directors?

The creditor who suffers due to the Wrongful Trading of a Director who ought to have stopped trading sooner would rightfully feel aggrieved save if he was compensated by the government expeditiously. If it was to go further and then subsequently cause the customer’s business to fold also, then the Government will through its own policy be at risk of not only sanctioning a wrong but also through doing so, it risks making a problem worse. It risks the prospect of passing a parcel of debt around. In doing so there could be businesses that are hit much later down the chain that might not be in a position to take advantage of the wrongful trading suspension.

Secondly, it actually does not appear to create a breathing space by safeguarding jobs or companies; it merely reduces a liability which may arise. The rationale for that proposition is that suspension of Wrongful Trading from a particular date is not suspension of Wrongful Trading per se. It is inherent that liquidation is inevitable for Wrongful Trading to arise in the first place so it is axiomatic it does nothing more than put off the inevitable. It is perhaps ironic that Wrongful Trading as a provision is one rooted in avoidance of putting off the inevitable.

Observation

The question is should we sanction the consequences of a wrongful act to seek to alleviate the current economic pressures by making it permissible for someone to cause loss to another?

Does that not send the wrong signals out to the business community? Does that not infringe the cardinal principle that a wrong ought to have a remedy?

If the Government wanted to relieve some of the symptoms of its Coronavirus policy for businesses, then rather than a suspension of Wrongful Trading there are many options available to it besides sanctioning of the wrongful act on another.

It is worth perhaps remembering that Wrongful Trading was put on the statute book to deal with a very real problem that was considered inherently undesirable which other laws did not adequately address due to the very high threshold for Fraudulent Trading.

It troubles me to say this in these terrible times but to my mind, it is unpersuasive and conceivably wrong to suspend wrongful trading for any period of time.

Disclaimer: This post “Suspension of Wrongful Trading: Wrong Trade-off?” is not legal advice and not accepted by the author and or the author’s firm, Oliver Elliot Chartered Accountants as such. No reliance should be placed upon the same. This post highlights some concerns which may arise as the precise structure to the legislation is not currently fully known. To that extent, it has certain assumptions and will venture into speculation. You should seek independent professional legal advice on the facts of your case.

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