Wrongful Trading – Amendments to legislation

Much has been made of the hopefully imminent suspension by the Government of wrongful trading laws.

Presently, under section 214 of the Insolvency Act 1986 directors can be personally liable should they continue to trade a company once they conclude (or should have concluded) that the company has no reasonable prospect of avoiding insolvent liquidation. Once they reach that conclusion they should take every step possible to minimise losses to creditors.

Should the directors not do so, then a liquidator of the company can claim a contribution to the company’s assets from the directors personally.

It has been said that the suspension of these provisions removes the threat of personal liability on directors, and that, for example, it will allow them to pay company staff and suppliers without then facing the accusation of increasing losses to creditors as a result of such payments.

However, it may help nervous directors to know that  research stretching back a few years shows that the reality is that prosecutions for wrongful trading are relatively few, when compared with prosecutions for other misdemeanours under the Insolvency Act/ Companies Act, such as for example sale at an undervalue, preference, misfeasance etc.

Analysis shows that there are varied and complex reasons for the low rate of prosecutions, and still lesser rate of convictions.

One reason is said to be that judges are already mindful of the fact that too stringent an approach to the legislation would have the consequence of directors placing businesses into insolvency proceedings too soon, in order to avoid the penalties under section 214.

Another reason interestingly is the rather non-specific provisions of section 214:

Except perhaps in the most obvious cases, it is not at all easy to say when a director “ought to have known” “that a company “had no reasonable prospect of avoiding liquidation”. In a fast flowing financial reorganisation when is there “no reasonable prospect…”, and just how is “ought to have known” assessed?

Whatever changes are made, demonstrable good faith attempts to keep a company afloat are viewed by judges favourably anyway, according to research carried out.

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