The Government must urgently extend the suspension of ‘wrongful
trading’ rules for company directors or risk seeing a flood of
businesses closing up shop before Christmas, Labour has warned
today.
While protections against insolvency for businesses have been
renewed until 31 December, the suspension of a rule which means
business directors must cease trading if their company is facing
insolvency, has not been renewed in tandem and ended on 30
September.
This means company directors could now face financial or legal
action if their business is struggling to stay afloat during the
crisis but they do not cease trading, undermining Ministers’
rhetoric about the action they are taking to help businesses
survive the economic effects of the pandemic.
Business Minister said the
suspension intended to “support directors to continue to trade
whilst accessing the financial support put in place by
Government” but has offered no explanation for ending that
suspension despite restrictions tightening and the crisis raging
on.
Last month, there were 926 company insolvencies – a rise of
around 150 on the month before. The number of company
insolvencies in September was a third lower than it was last
year, which the Government suggests is “partly driven by
government measures put in place in response to the coronavirus
pandemic.” This means measures put in place to protect companies
from insolvency during the pandemic, welcomed by Labour, have
been working - but a flood of insolvencies is likely if they are
removed while the crisis is ongoing.
Shadow Business Secretary has called for the wrongful trading standard
suspension to be renewed to the end of the year, to avoid company
insolvencies snowballing before Christmas.
Labour is also warning that these insolvencies would ultimately
cost the taxpayer, as emergency loans would be written off rather
than paid back if the business goes under.
MP, Labour’s Shadow Business Secretary,
said:
“We are already seeing mass redundancies and rising unemployment,
but measures to prevent businesses from becoming insolvent have
helped keep the number of business closures low.
“Labour welcomed those measures. Yet Ministers cannot explain why
they have pulled the plug on this protection. If it was right to
help businesses stave off insolvency in June it is right now. The
government seem to have moved from 'we're all in this together'
to 'sink or swim'.
“Ministers claim to want to protect struggling businesses, but
the decision to remove this key protection for business owners
flies in the face of that claim. They must urgently change course
or the risk is that we see insolvencies snowball before
Christmas.”
Ends
Notes to Editors
- The Corporate Insolvency and Governance Act 2020 introduced a
suspension of liability for wrongful trading applying from 1
March to 30 September 2020.
- The Insolvency Act 1986 sets out that the board of directors
has a strict duty to announce a cessation of trading if the
company is insolvent – or if insolvency cannot realistically be
avoided in the near future.
- The 1986 Act requires a company to be placed into an
insolvency procedure – such as administration or liquidation – in
order to safeguard the interests of the company’s creditors.
Under the 1986 Act, failure to do so carries the risk of personal
liability.
- In answers to three written questions here, here and here, Business Minister
failed
to set out the rationale for ending the suspension of the rule
against wrongful trading whilst extending other company
insolvency protection measures.
- September insolvency statistics can be found here.
