Two Wrongs make an...um?


20 May
20May

Now we know. S.10 of the Corporate Insolvency and Governance Bill 2019-21 states:-

In determining for the purposes of section 214 or 246ZB of the Insolvency Act 1986 (liability of director for wrongful trading) the contribution (if any) to a company’s assets that it is proper for a person to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period.

The proposed legislation does not change the tests to be applied as to whether a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. As we must assume that as a result of the pandemic there will be many more companies that cannot avoid liquidation at some time in the future, it follows that these companies must still be incurring debts that they will not be able to pay but there is currently no incentive for directors to do anything about that.

From the point of view of the director that sounds like good news but is it really? This only applies to when you go bust and then if you are sued. In the meantime your company is still insolvent and there is no realistic prospect of avoiding it (otherwise move on, this article is not relevant to you) so your duty to members has already been replaced by your duty to creditors. Your s.172 CA06 duty to promote the success of the company is now a duty to pursue a custodial strategy towards the business and its assets and anyone you pay, including yourself, may well be reversible as a preference. And you can’t take dividends ahead of this inevitable liquidation. And I’m not sure what the bank are going to do about the overdraft. And you might get Disqualified. And there is still misfeasance.

From the point of view of the advisor they can say with confidence that the director cannot be sued for wrongful trading at the moment. Or can they? The legislation does not exclude any liability it merely directs the court to make the assumption that they are not responsible for the losses. Is that a rebuttable presumption? Come on, the clock is ticking and the director needs an answer. While you are thinking about that the director asks what happens if they trade on and pay off the creditors incurred in the Relevant Period but run up new debts. Does the statutory assumption still apply? What about the individual losses of creditors? The net deficiency may be unchanged (per Ralls) but the director has paid them off and incurred new ones when they knew the company can’t avoid liquidation (per Leitch or s.213 if you are not careful). After that, the advisor can explain that the company is still insolvent and the director still has Companies Act duties as well as the prospective Insolvency Act ones. 

From the point of view of the creditor you might think of doing something to help yourself as you are now potentially trading with a director brandishing a get out of jail free card. They can trade without worrying about whether your bill is paid or not. You still have your self-help remedies so you might want to ask the carefree director to put in writing to you that you will be paid for the supplies that you are about to make. Then when it goes wrong you can run a Tort of Deceit claim. Failing that, cash on delivery might be a good idea.

From the point of view of the liquidator I am sure they thank the government warmly for a nice fudge that complicates an already messy playing field. Every future case for the next decade will attempt to grapple with the Relevant Period. Directors accused of misfeasance and fraud will plead that it was merely wrongful trading and they are protected by this legislation. Liquidators will have to guesstimate losses between two more dates to deduct from the amount of losses between two other dates, possibly on three different bases. I am sure the liquidators can do it but at some point we will make the lawyers cry.

From the point of view of the country I am not clear what will be achieved. If the purpose of the legislation is to change behaviour to avoid a wave of insolvencies then it fails, not least because it is retrospective. No amount of legislation is going to change past behaviour! If it is intended to affect future decisions then it’s hard to see how. Anyone getting advice will be told that if insolvent liquidation is unavoidable it’s probably not safe personally to keep ploughing on and if you can trade out then none of this legislation affected you anyway.

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