HM Insights

U-turn puts suspension of wrongful trading in place again, until 30 April 2021

The Corporate Insolvency and Governance Act 2020 (CIGA) introduced a series of temporary measures in March 2020 in response to Covid-19. One of these measures was the suspension of directors' liability for wrongful trading where a company was in financial difficulties as a result of Covid-19 (see our previous article). This first period of suspension of wrongful trading was effective from 1 March until 30 September 2020 under the CIGA.

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 (CIGA Extension Regulations) which came into effect on 29 September 2020 extended certain temporary measures but did not extend the suspension of wrongful trading.

The reinstatement of wrongful trading rules has meant that since 1 October 2020 directors could again be personally liable for continuing to trade and incur new debt in circumstances where they knew or ought to have known that the company might not be able to avoid insolvency.

Coronavirus-legal-updates-2020v5.jpg

Government U-turn

For reasons which have not been made clear, and in an apparent U-turn on the CIGA Extension Regulations, The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 came into force on 26 November, reintroducing the suspension of wrongful trading.

This will mean that, with effect from 26 November 2020 and until 30 April 2021, administrators and liquidators will be unable to raise claims for wrongful trading against the directors of any insolvent company in respect of any of the company's losses or its creditors' losses which arose directly as a result of continued trading during this second period of suspension.

Unlike the CIGA, the measures introduced are not retrospective so that claims arising in the gap period of 1 October to 26 November 2020 cannot be ruled out.

Word of caution

Directors ought to remain cognisant of the fact that this suspension of wrongful trading, as before, does not give directors carte blanche to behave unscrupulously. Directors continue to have various directors and fiduciary duties and could still find themselves personally liable if in breach of those.

We're here to help

Please contact our specialist Restructuring & Insolvency and Dispute Resolution teams for advice the effect of these changes on insolvency proceedings and debt recovery processes.

RESTRUCTURING & INSOLVENCY LAW