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Government must reinstate insolvency protection as restrictions return

22 Oct 2020

meeting

The IoD is urging Government to reinstate a key insolvency protection for company directors, to prevent a sharp rise in insolvencies as restrictions come into place across the country.

Earlier this year, the Government suspended ‘wrongful trading’ rules, under which directors can face legal and financial liabilities if they don’t cease trading when their organisation faces insolvency. This protection ended in 30 September.

The IoD also warned that current business support measures did not account for the impact of restrictions across the supply chain, calling on Government to consider extending grant support through local authorities.

Roger Barker, Director of Policy at the IoD, said:

“Failing to extend the suspension of wrongful trading rules was a mistake. Without this protection, the pressure is on directors to simply shut up shop when faced with difficulty.

“At the start of the crisis, the Government rightly sought to give directors breathing space to see their organisations and staff through lockdown. With significant restrictions returning across the country, it’s hard to see how this logic doesn’t still apply. For many businesses, there is still very little clarity around long-term viability.

“It’s clear that the full impact of regional lockdowns isn’t accounted for by the Government’s current measures. There needs to be some form of supply chain support to address this. Whether this is done by extending the enhanced Jobs Support Scheme, or through discretionary local authority grants, the gap needs to be plugged soon. Business support should also be determined in as transparent a manner as possible.” 

Further detail

In June, the Government introduced emergency coronavirus legislation that introduced a time-limited suspension of director liability for ‘wrongful trading’ applying from 1 March to 30 September 2020.

Before the emergency measures were introduced, under the Insolvency Act 1986 the board of directors has a strict duty to announce a cessation of trading if the company is insolvent – or if insolvency cannot realistically be avoided in the near future.

In that situation, the 1986 Act requires a company to be placed into an insolvency procedure – such as administration or liquidation – in order to safeguard the interests of the company’s creditors. Under the 1986 Act, failure to do so carries the risk of personal liability to the company’s directors.

The suspension of wrongful trading does not affect directors' wider liabilities under company law, for instance around fraudulent trading.

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