Alert 14 October, 2020

Potential Personal Liability Of UK Directors For Company Debts

Summary
This bulletin is of particular interest to our clients and contacts who are directors of UK companies which face liquidity issues. Directors (including shadow directors) can be liable for the debts of their companies when trading in the zone of insolvency or twilight period. A statutory defence exists if directors are able to demonstrate that they were taking every step to minimize losses to creditors.

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’.
 
Please do not hesitate to contact us if you wish to discuss this further.
 
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