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:
- The date on which the directors realized (or should have realized) that there was no reasonable prospect of avoiding insolvency; and
- 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.
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