The Government is risking a substantial increase in company collapses by not extending a key insolvency measure, the Institute of Directors warns today.
In its Winter Economy Plan last week, the Government failed to renew the suspension of ‘wrongful trading’ rules for company directors.
Under normal circumstances, directors have a strict duty to cease trading if their company is facing insolvency and may face financial or legal liabilities if they fail to do so. In June, the Government suspended the threat of liability for this 'wrongful trading', giving directors breathing space to secure their organisation, but the protection runs out today [30 September].
The IoD has called for the protection to be extended to the end of the year, in line with other insolvency measures, which were renewed last week.
Roger Barker, Director of Policy at the IoD, said:
“The failure to extend this measure sends a bad signal to directors across the country, and risks opening the door to a wave of avoidable insolvencies.
“Many directors, particularly in sectors like hospitality, tourism, and events, still have little clarity on the long-term viability of their companies due to the pandemic and public health measures. The suspension of these rules has given business leaders greater confidence to press on and seek a way through the uncertainty for their organisation and staff. Now, the message to businesses against the wall appears to simply be to shut up shop.
“The Government took some positive steps last week to support a business-led recovery. But with so much uncertainty around the virus, and with the new Job Support Scheme unlikely to prevent many redundancies, reapplying wrongful trading rules is a serious misstep. The Government shouldn't prop up companies that aren't viable in the long term, but as we enter new restrictions, the definition of long-term viability is far from clear-cut.”
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.