The Government is risking a substantial increase in company
collapses by not extending a key insolvency measure, the
Institute of Directors warns today [Wednesday].
In its Winter Economy Plan last week, the Government failed to
renew the suspension of ‘wrongful trading’ rules for company
directors.
Under normal circumstances, directors have a strict duty to cease
trading if their company is facing insolvency and may face
financial or legal liabilities if they fail to do so. In June,
the Government suspended the threat of liability for this
'wrongful trading', giving directors breathing space to secure
their organisation, but the protection runs out today [30
September].
The IoD has called for the protection to be extended to the end
of the year, in line with other insolvency measures, which were
renewed last week.
Roger Barker, Director of Policy at the IoD, said:
“The failure to extend this measure sends a bad signal to
directors across the country, and risks opening the door to a
wave of avoidable insolvencies.
“Many directors, particularly in sectors like hospitality,
tourism, and events, still have little clarity on the long-term
viability of their companies due to the pandemic and public
health measures. The suspension of these rules has given business
leaders greater confidence to press on and seek a way through the
uncertainty for their organisation and staff. Now, the message to
businesses against the wall appears to simply be to shut up shop.
“The Government took some positive steps last week to support a
business-led recovery. But with so much uncertainty around the
virus, and with the new Job Support Scheme unlikely to prevent
many redundancies, reapplying wrongful trading rules is a serious
misstep. The Government shouldn't prop up companies that aren't
viable in the long term, but as we enter new restrictions, the
definition of long-term viability is far from clear-cut.”
Further detail
In June, the Government introduced emergency coronavirus
legislation that introduced a time-limited suspension of director
liability for wrongful trading applying from 1 March to 30
September 2020.
Before the emergency measures were introduced, under the
Insolvency Act 1986 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.
In that situation, 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 to the company’s directors.
The suspension of wrongful trading does not affect directors'
wider liabilities under company law, for instance around
fraudulent trading.
