COVID-19 – wrongful trading provisions re-suspended

As noted in our previous Perspectives Article, in March 2020, the UK Government announced the suspension of the wrongful trading provisions contained in s.214 of the Insolvency Act 1986. Those provisions impose personal liability on directors found to have over-traded while a company was insolvent. The Government allowed the suspension to expire at the end of September 2020 despite the ongoing pandemic. In an apparent change of position, however, the Government has now announced the re-introduction of the suspension.

The original suspension expired on 30 September 2020. As noted in our previous Perspectives Article, this was despite an increase in the number of infections at the time which led to new restrictions being introduced, although those restrictions stopped short of a second lockdown. The consequence of the expiry of the suspension was that directors were required to consider whether they would be able to continue trading into October 2020 and beyond.

Curiously, the re-introduction of the suspension applies from 26 November 2020, which is around one week before the second national lockdown came to an end on 2 December 2020. The new suspension applies until 30 April 2021.

The fact that the re-introduction of the suspension applies from 26 November 2020, however, means there is a period (1 October 2020 to 25 November 2020) when the suspension did not apply. This could give rise to situations in which directors could be found to have over-traded during this limited period only. It may be that this gap is nothing more than an unintended oversight on behalf of the Government, although it is curious it has not decided to retrospectively apply the re-introduction of the suspension to this period to avoid perverse consequences.

In any event, the reintroduction of the suspension provides directors with renewed protection to continue trading through the ongoing pandemic without risk of personal liability for having over-traded (so long as the business was not in distress before the onset of the pandemic). That said, April 2021 is not far away and whilst it is possible the suspension will be extended again in the event restrictions remain in place at that time, it is sensible for directors to consider the long-term viability of businesses now so that steps can be taken in advance of the re-introduction of wrongful trading provisions.

In particular, businesses should consider whether they have any claims arising out of COVID-19. To that end, Hausfeld’s £1 Million COVID-19 Commitment continues to operate. Hausfeld will commit up to £50,000 per case to investigate the viability and merits of any claim related to COVID-19. In the event a meritorious claim is identified, Hausfeld will work with clients - whether businesses themselves or office holders in the event of an insolvency - to bring claims, including through the use of alternative fee structures where helpful.