Potential Personal Liability Of UK Directors For Company Debts

Goodwin
Contact

Goodwin

REINSTATEMENT OF WRONGFUL TRADING LIABILITY FOR UK DIRECTORS

As part of its response to the crisis caused by the COVID-19 pandemic, the UK government suspended the liability of UK company directors for wrongful trading from 1 March 2020. Whilst the government protections for business tenants through relief from forfeiture of leases and winding up proceedings have been extended to 1 January 2021, the protection for directors from personal liability for wrongful trading has not been extended and ended on 30 September 2020.

Under UK insolvency law, directors can become personally liable for the debts of the company where it is found that they proceeded to continue to trade a company which had no reasonable prospect of avoiding administration or liquidation. The liability applies to statutory directors and also those deemed to be shadow directors. If found to have continued to trade at a time when there was no reasonable prospect that the company would avoid administration or insolvent liquidation, the directors may be personally liable for the losses caused to creditors which occurred as a result of their decision to continue to trade. The court, therefore, will need to determine:

  1. The date on which the directors realized (or should have realized) that there was no reasonable prospect of avoiding insolvency; and
  2. The net debt deficiency at that date compared to the net debt deficiency on the date that the company entered into administration or insolvent liquidation.

The defence to a wrongful trading claim is that the director took every step with a view to minimising the potential loss to creditors as he or she ought to have taken. This is determined on the facts of each matter and will necessarily consider the circumstances as they appeared at the time. Taking every step can include trading whilst a distressed sale process is being run (in order to preserve value in the business and assets). Well-advised directors will take legal and/or accounting advice in order to support the defence.

Please see our ‘Guidance to UK Directors’.

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.

© Goodwin | Attorney Advertising

Written by:

Goodwin
Contact
more
less

Goodwin on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide