Directors and their duties

Here Partner and Head of Business Recovery, Jason Elliott looks at the government’s recent Wrongful Trading and Temporary Insolvency Practice Direction announcements and gives his warning and advice to company directors.

Approximately two weeks ago the current Secretary of State for Business, Alok Sharma announced temporary measures and changes to the current insolvency regime to assist company directors in these very difficult times.

He made specific reference to the introduction of a moratorium on Wrongful Trading claims that could be made against directors during the three-month period starting 1 March 2020. He also reminded directors within the same speech, that there would still be “checks and balances” in the event of subsequent formal insolvency proceedings,  his very subtle way of letting directors know that their statutory and fiduciary duties still remained and that breaches of those would still be challenged by appointed professionals albeit under other powers (i.e. Preferences and Misfeasance).

At the same time, he made a less specific reference to impending changes to the current insolvency regime and along with the rest of the profession I, as an insolvency practitioner sat back and waited patiently for these to land. Since then we have had ‘The Temporary Insolvency Practice Direction 2020’ (TIPD) which came into force on 6 April 2020. The reality is that TIPD is mainly a practical guide to assist us as Insolvency Practitioners, to navigate the current restrictions with considerable focus on the ability to file forms online and access to solicitors and courts during the lockdown.

All is not lost however, there is proposed new legislation in the pipeline which will deal with cash-flow issues caused to otherwise-healthy businesses as a result of the COVID-19 crisis.  We are led to believe that concrete proposals will appear in the form of draft legislation after Parliament’s Easter recess.

I have highlighted the above two words because this proposed new legislation is being brought in to help directors of historically healthy businesses, who now find themselves financially stressed because of the COVID-19 crisis and it is very important that directors understand this.

At the time of Mr Sharma’s address, along with many other insolvency professionals, I wrote tweeted and blogged about the pitfalls that could befall directors of companies who succumbed to the temptation to continue to trade a business that was insolvent or, in likely need of a process.  As at 1 March 2020 and I would reiterate that this is not a “charter” to enable insolvent businesses to just continue.

When the alternative is to hand control of your company to an Insolvency Practitioner I can fully understand the temptation for directors to delay the decision – especially in these creditor “relaxed” times – and to instead apply for any new financial assistance on offer, defer HMRC for three months and to use the government’s staff furlough provisions. However, directors of companies that were insolvent at the time of the crisis, who decide to continue anyway, should be taking significant steps to justify their actions.  My fear is that those where the insolvency existed prior to March and those who are adjudged to have frivolously utilised these measures, with little or no chance of the company surviving long term (when there is an imminent future failure) may find that Mr Sharma’s “checks and balances” come home to roost.

If you are the director of a company and are unsure of your duties, please take advice from your accountant or an appropriately qualified professional.

Should you require any further information do not hesitate to contact Jason directly.