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Corporate Insolvency and Governance Act 2020 (“CIGA”) – Wrongful trading

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The headline, ‘Wrongful trading temporarily abolished’, when it was announced three months ago sounded far more controversial than what we now see in the Act.

Section 214 of the Insolvency Act 1986 (“the Act”) states that a director or shadow director can be made liable for losses arising after the moment when that person should have known that there was no reasonable prospect of avoiding insolvent liquidation. In other words, when they should have stopped the music, rather than carrying on and ‘hoping for the best’. The temporary amendment brought in by CIGA simply states that when the court is determining the contribution to the losses that a director should make, the court must assume that the director was not responsible for any worsening of the financial position of the company or its creditors between 1 March 2020 and 30 September 2020.

A few words of caution for directors overseeing companies in a position of uncertainty:

While it may be extended in due course, the temporary amendment will be lifted on 30 September, when directors can once again be found personally liable for losses arising after that date.  If during the coronavirus period a company’s financial position has suffered to such an extent that it cannot be reasonably expected to avoid liquidation, the directors need to be proactive lest they be accused of not preventing the losses arising after 1 October; rent, utilities, payroll and HMRC liabilities for example.

Also s212 of the act which provides a remedy for breaches of directors’ duties, remains as it always has been: If ‘an officer of the company’ is found to have breached their fiduciary or other duty ‘the court may… examine the conduct of the [officer]… and compel him to contribute such sum to the company’s assets….. as the court thinks just.’

Regardless of the specifics of s214 and the temporary amendment thereto, when a company is in a dire financial position the directors have a duty to assess the situation and do what’s best. If a liquidator can present evidence to the court that had an assessment been undertaken it would have been obvious to the director that the company was beyond the point of no return, and that by doing nothing the he/she allowed the position to worsen, the court could be persuaded that it’s ‘just’ to compel that director to contribute to the losses arising as a result of their inaction, with no need of the wrongful trading provisions.

For advice on Corporate Insolvency and Governance Act 2020 and wrongful trading please feel free to contact me or one of the corporate restructuring partners.

Dominic Dumville

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