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Campaigns Good Governance Blog

'Wrongful trading' - how the IoD secured a key legal protection for directors during the Covid crisis

16 Dec 2020

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Throughout this year, directors have been under immense pressure. The Covid pandemic has cast complete uncertainty around the building blocks of business: demand, income and cashflow. Directors have had to chart a way through the storm for their organisation and staff.

The IoD has worked closely with Government, pressing for every possible means to give directors the support to fulfil this challenging mission.

One key area we have worked on is insolvency law. Under normal circumstances, 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.

However, with unprecedented restrictions coming into force, long-term viability has been far from clear. As a result, we urged Government to bring about a time-limited suspension of director liability for ‘wrongful trading’, which came into force in June. This gave directors more breathing room, while not affecting wider liabilities under company law, for instance around fraudulent trading.

As the virus appeared to recede, key support schemes such as the furlough were wound down. But with the resurgence later in the year, it was clear that that support had to return.

Unfortunately, the wrongful trading suspension was not reinstated. Fearing that directors could be under the cosh through no fault of their own, we press Government in private and publicly on this issue. Publishing numerous press releases, we generated coverage across the media, in the Financial Times, Telegraph, Mail, Times, Sunday Times and more. Following this campaign, the Government announced that this crucial protection would be instated.

We know that the challenge for directors isn’t over, though the vaccine offers grounds for hope. If you have any concerns, thoughts, or questions, don’t hesitate to contact the policy team, to see how we can help you influence the people that matter.

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