Does the suspension of 'wrongful' trading really matter? Does it actually help?

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It was not truly a suspension as wrongful trading remained a possibility it was just that when calculating any director’s liability for it the court was told to leave out of account losses in the ‘suspension’ period.  But the Government decided that on expiry of the original suspension they would not extend the period beyond 30 September.  Now they have changed their mind and a new suspension period has started on 26 November 2020 with an expiry date of 30 April 2021. 

The question is: does this really matter in practice?  Will it actually help directors of companies in financial difficulty?  Arguably not as much as one might think.  Why?  Because a transgression without quantified liability is still likely to be an unattractive place to be and because wrongful trading does not sit alone in English law in regulating the conduct of directors, particularly in the context of acting ‘reasonably’ – the words ‘reasonable’ and ‘reasonably’ crop up a number of times in the wrongful trading provisions.   But, all directors have to act in good faith in the best interests of their company and exercise due care and skill when doing so.  And when insolvency looms – is likely – the interests of the company come to mean those of the creditors whose money at that stage is in play. 

Sure, acting in good faith in the company/creditors’ best interests principally what subjectively that director believes but only if they actually think about the creditors and do not leave out of account key considerations.  If they fail to do that the law asks what a reasonable director would think and do.  The wrongful trading suspension does not remove the need for directors to act reasonably in creditors’ interests.  That requirement is still there.  But all is not doom and gloom.  Directors can and should take appropriate legal and financial advice and act accordingly: with appropriate – and robust – advice it should not be too difficult for directors to act reasonably even in these troubled and extraordinary times. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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