Guidance

Suspension of wrongful trading liability

Updated 5 June 2020

This guidance was withdrawn on 22 February 2023

This bill became law on 25 June 2020. See the Corporate Insolvency and Governance Act 2020.

The suspension of wrongful trading included in the Corporate Insolvency and Governance Bill is a temporary measure.

What are we going to do?

The Bill will temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the crisis with the uncertainty that the company may not be able to avoid insolvency in the future. Liquidators and administrators will not be able to make a claim against an insolvent company’s directors for any losses to the company or its creditors resulting from continued trading while the wrongful trading rules are suspended. This will remove the pressure on directors to close otherwise viable businesses to avoid potential liability. All the other checks and balances on directors remain in place.

How will it work in practice?

Take this example case study:

A company runs a pub in Cornwall. It has steady trade during the winter months, but relies on heavy tourist trade in summer to cover the slower winter period. Up until March it has been trading successfully and making a profit.

The pub has to close in March due to the pandemic. It puts most of its staff on furlough, but has to retain a cleaner, a gardener, and a person to do odd maintenance jobs, all self-employed, and all of which are still needed for the closed business.

The quarterly rent for March has just depleted the reserves, and the next rent payment will be due in late June. A lot of money was lost in wasted perishable stock. Without the summer trade there is a good chance that the company will not have the ready resources to pay June’s rent.

The directors get together and discuss the future of the business. They decide that there is good reason to believe that, if the pub can open by the end of June, there will be sufficient business in the rest of the summer for the company to get by. Unfortunately, they have absolutely no way of knowing whether the pub will open in June, or later. They just do not know.

What they do know is that the company will be insolvent in June when it can’t meet its rent bill and will be forced to go into administration. They have to ask themselves whether it is right that they should continue to use utilities and to continue to use cleaning, gardening, and maintenance services with the uncertainty around whether they will be able to pay them. They would need to order more perishable stock, on credit, for a late June reopening. They also need to consider their own position as directors receiving remuneration, as they have mortgages to pay. These are very hard decisions, and they will need to use forecasting and consider the likelihood that trade may take some time to return to normal levels, even for summer. They have to decide whether to continue trading in the hope of reopening, or whether to stop now.

If they do continue to trade, and the pub does not reopen in June, it could be said that they knew the company would become insolvent and administration proceedings were inevitable in March, because there was insufficient certainty to justify the pub continuing to trade. This then leaves them open to a wrongful trading action by the administrator, potentially leading to a court declaration that they are personally liable to contribute to the company’s assets for the period after the pub closed in March.

This will have a serious impact on their decision making. Not only are they likely to lose their source of income from the pub, but they could also be held liable to contribute to the pub’s creditors. Without any certainty about reopening, they are likely to decide to cease trading straight away. The Government offers a Business Interruption Loan (BIL), but if they take that then it could increase their liability through a wrongful trading action because they had no certainty that the company would be able to repay it.

Removing the threat of personal liability through a wrongful trading action does not take these difficult decisions away. But it does mean that they can make them without fear of the impact on themselves and their families. In particular they could accept the BIL without fear of becoming personally liable for it. If the pub does not reopen by July then it may still be forced to go into administration, but they will not face a wrongful trading action.

Who will it apply to?

These measures will apply to: 

• All the main incorporated forms
• Other bodies and associations, whether or not incorporated

Exclusions will apply to:

• Financial services. A full list is set out in legislation.