Directors duties and wrongful trading – some practical advice
End of temporary suspension on personal liability on directors
At the beginning of the pandemic the UK government temporarily removed the risk of personal liability for directors due to the unprecedented conditions caused by the crisis, knowing it would cause major problems for directors in assessing whether their business could continue to trade and that many good businesses would be adversely affected through no fault of their own.
This temporary suspension came to an end on the 30th September.
Directors Duties and wrongful trading
In brief, wrongful trading occurs when directors have continued to trade when they knew, or ought to have known, there was no reasonable prospect of the business avoiding insolvency and the directors did not take every step to minimise the potential loss to the company’s creditors. In the event that wrongful trading occurs, and the company enters insolvency, the directors could be held liable for the company’s debts from the point they knew or ought to have known the company was insolvent.
Points to consider as Government support ends/changes
Some directors will have big decisions to make, both immediately and in the coming weeks and months, as various government initiatives begin to unwind, or are replaced by reduced or new measures. Such decisions may include which creditors should be paid, whether the losses currently being incurred are sustainable and if the company can continue to trade in its present format.
End of Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme comes to an end on 31 October which means for those businesses with 20-99 employees, any employers looking to make redundancies will need to be providing the requisite 30 days’ notice to employees over the coming few days.
How can a director best defend themselves against accusations of wrongful trading?
When a business is solvent it is the duty of the directors to act in the best interests of the shareholders. When it becomes apparent the business is insolvent then such duty extends to having to act in the best interest of the creditors as a whole, i.e. if directors are going to continue to trade, they should not do so at the expense of creditors.
In theory that all sounds quite reasonable but in the harsh reality of a competitive trading environment it isn’t always as cut and dry as this, especially when the pandemic continues to add increasing strain.
Seeking professional assistance
Decisions about continuity of trade need to be based on sound financial information and professional advice. Directors need to be provided with an up to date trading profit and loss account and a balance sheet on an agreed and regular basis. Furthermore, provision of daily and weekly cash flows will provide evidence of immediate and future cash availability. Such information will show how the business has performed in the past and provide a snapshot of its current financial position. To understand what the future is looking like, directors will need to have access to an integrated forecast profit and loss, cash flow and balance sheet. Having access to appropriate financial information is essential.
The financial information needs to be prepared on a reasonable and sensible basis. Directors are not expected to have a crystal ball but the assumptions which underpin any forecasts should be noted, clearly explained and substantiated with sound business rationale.
Keeping records of key decisions
Directors should make records of key trading and business decisions. Typically, such records would be in the form of minutes of board meetings, but they could also be notes of telephone calls or exchanges of emails. Such documents can be valuable proof that the key decision makers have given careful consideration to matters of fundamental importance to the business.
Being able to demonstrate there is a clear decision making process and structure in place, (ie regular board meetings and the sharing of up to date financial information) is a simple and effective measure to show directors have acted reasonably and responsibly and will ultimately provide a defence to any accusation of wrongful trading.
Know your obligations
During these uncertain times directors should familiarise themselves with their obligations under the Companies Act. You don’t know what you don’t know and being uninformed of such provisions is not an appropriate defence for a director. In particular, directors should be mindful of their dealings with connected parties (do the directors know which parties are deemed to be connected and was the prior approval of members sought and obtained for such dealings) and should seek to avoid any conflicts of interest, perceived or otherwise.
At all times the directors need to demonstrate they have acted in the best interests of the company and its creditors. The definition of directors will include both executive and non-executive. Similarly, directors will be deemed to have knowledge of all matters pertaining to the business and not just their particular service line or division.
For a recap of all the obligations of a company director visit https://companieshouse.blog.gov.uk/2019/02/21/7-duties-of-a-company-director/
Trading with knowledge or concern of the viability of the business
Trading with knowledge of insolvency or at the very least there is concern as to the future trading and viability of the business, is sometimes referred to as trading in the twilight zone. Where directors find themselves in this situation, they should seek professional advice from their existing accountant, solicitor or IP to better understand the restructuring options and contingency planning measures which are available. Such professional advice should be in writing and will be further evidence of directors properly discharging their duties and obligations.
Avoiding accusations of wrongful trading
In summary for directors to avoid any accusations of wrongful trading they will need to show that they clearly understand how their business has been performing and were aware of when their duties shifted from having to act in the best interest of the members to having to act in the best interests of all creditors. At all times there will need to be clear and evidential proof the directors took all reasonable steps and measures to act in the best interest of the company.
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