On 28 March 2020 Alok Sharma MP, the Business Secretary, with HM Revenue & Customs, the Insolvency Service and others announced intentions to amend insolvency law and relax wrongful trading laws during the current Covid-19 emergency. According to the press release:
“Current insolvency rules stipulate that directors of limited liability companies can become personally liable for business debts if they continue to trade when uncertain about whether their businesses can continue to meet their debts. Relaxation of these wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.”
Legislation to introduce the changes is intended to be introduced to Parliament as soon as possible.
There are several duties with which a director must always comply. The duties are owed to the company itself, but company law has established that the duties are properly owed to those with financial interests in the company: usually the shareholders but when insolvency intervenes, the company’s creditors. Directors must also consider the position of the company’s employees and the degree of directors’ duties to their company’s employees is developing and is likely to be enhanced during the emergency.
The Companies Act 2006 introduced statutory duties to reflect the duties which had developed under earlier case law. These include a duty to exercise reasonable skill and care (section 174 of the 2006 Act). Directors are required to exercise a degree of skill and care that would be reasonably expected of someone in their position but also what would be expected according to their own knowledge and personal experience.
The relaxation of the wrongful trading rules envisaged by the government is remarkable as Courts have indicated that when determining whether a director has exercised due skill and care in his normal duties, the benchmark should be taken as the very standard of conduct required in relation to wrongful trading. The test in section 214 of the Insolvency Act 1986 states that a director will be assessed according to:
“…the facts which the director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken by a reasonably diligent person having both –
(a) the general knowledge, skill and experience that maybe reasonably expected of a person carrying out the same functions as carried out by that director in relation to the company, and
(b) the general knowledge, skill and experience that that director has.”
If the wrongful trading provisions are relaxed as the government have indicated, it is questionable what standard of care and skill is to be expected instead. The very relaxation of the rules might introduce more uncertainty, especially as the press release makes clear that “the rules as to existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.”
Whilst the sentiment behind the reforms cannot be faulted, the implementation, especially if hurried and without codification of an alternative level of skill and care, risks adding to beleaguered directors’ fears, rather than providing any comfort.
Lewis Onions Solicitors has many years’ experience in advising, assisting and protecting directors in crisis situations. We will remain fully accessible throughout the emergency and ready to provide the support and peace of mind that directors need in these trouble times.