Although the Government has now introduced a temporary relaxation of the wrongful trading rules, under s.214 of the Insolvency Act 1986 – where a director could be held personally liable and have to contribute towards a deficit if he or she continued to trade a company past a point where they “knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation” and did not take “every step with a view to minimising the potential loss to the company’s creditors” – a company’s general financial health and future prospects should feature highly on every board of directors’ agenda.
This temporary suspension of the wrongful trading rules will allow directors to continue to pay staff and suppliers, in preference to others, despite liabilities that might be overdue (potentially rendering the company insolvent), without the risks to them personally, that would normally be associated with continuing in these circumstances.
The purpose of the wrongful trading sanction being relaxed is to encourage directors to continue their businesses, in these unprecedented times, in the hope that instead of suffering a collapse, they instead emerge intact and able to rebuild once the Covid-19 pandemic is finally over.
If you would like further advice on your obligations and what you can and cannot do, as a director, to include if you decide to furlough yourself, please contact a member of our corporate team. For further guidance on a director’s obligations by trading through these difficult times: https://solicitorstitle.co.uk/covid-19-directors-and-insolvent-trading