Suspension of Wrongful Trading Claims – Be Aware of the Pitfalls

Wrongful Trading

In view of the current coronavirus pandemic the Government is looking to amend current insolvency legislation providing additional protection enabling businesses to continue trading, in an attempt to prevent mass failures – leading to a significant rise in unemployment.

As part of their plan – unveiled by the Business Secretary, Alok Sharma, at the weekend – there will a three-month suspension, from 1 March 2020, of the wrongful trading provisions effectively removing the threat of personal liability during the Covid-19 outbreak should your company ultimately fail.

Whilst the removal of the threat of wrongful trading is to be welcomed and will allow businesses to use the Government’s support package previously announced by The Chancellor, existing laws such as fraudulent trading, misfeasance, preferences, transactions at an undervalue and directors disqualification do still apply and should act as a warning against wrongdoing.

Misfeasance

Misfeasance is the misappropriation of monies or property of the company and also covers breaches of fiduciary duty in relation to the company.

If a liquidator believes a director is guilty of misfeasance he can not only apply for restoration or the repayment monies he may also report the director’s conduct to the Secretary of State which may lead to disqualification as a director for up to 15 years.

Fraudulent Trading

Although the immediate threat of wrongful trading has been removed fraudulent trading remains in statute.

Whilst wrongful trading is a civil offence, fraudulent trading is criminal – if it can be shown that the business was carried on with the intention of defrauding creditors or in fact any fraudulent purpose.

If proven fraudulent trading can lead to not only financial penalties but in serious cases a prison sentence too.  Again, such conduct may also lead to your disqualification as a director.

Preferences

Preferences are when a person connected to the company does something to place one of its creditors in better position than it would otherwise have been in the event of insolvent liquidation. Examples of this may include repaying a lender, to whom you have provided a personal guarantee, or a settling a loan from a family member.

Penalties for a breach of the legislation include the transaction being set aside and personal liability, together with the potential of director disqualification.

Transaction at an undervalue (“TAU”)

A TAU is when an asset of the business is sold or transferred to a third part for a value significantly lower that its actual worth or for no consideration at all.

If proven this could lead to personal liability, a fine or in the most serious cases criminal prosecution. As in all the above director disqualification may also ensue.

 

If your company is experiencing financial problems, as a result of Covid-19, or you wish to discuss director’s duties please get in touch to discuss your current situation and the options available. Our skilled and experienced team of Insolvency Practitioners will help you find a solution.

Please call us now on 0330 159 8080 for a FREE confidential initial consultation.

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