COVID-19 - Wrongful trading temporarily suspended for struggling businesses

Updated: 30th March 2020

Wrongful trading insolvency regulation suspended to protect coronavirus hit businesses on the brink of insolvency, employed members of staff and outstanding creditors. 

Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma, announced on Sunday (March 29) that wrongful will be temporarily suspended to ease the pressure off struggling businesses hit by COVID-19 and will be applied retrospectively from March 1. The regulation which governs director liability will be put on hold for three months, protecting company directors from the threat of personal liability.

This move gives sufficient breathing space to company directors to continue trading with suppliers and third parties during the company restructuring process without falling foul of trading provisions, therefore protecting workers and the company from potential insolvency.

Business Secretary, Alok Sharma, commented, “Today’s measures will also reduce the burden on business, giving bosses much-needed breathing space to keep their workers employed and their companies going.

“These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends whilst ensuring creditors get the best return possible in the circumstances,” Mr Sharma said.

The unprecedented move to relax insolvency rules strengthens the future viability of financially distressed businesses, giving them a fighting chance to emerge intact following the Covid-19 pandemic. By hitting pause on the wrongful trading measure, businesses will now have a better chance of raising funds for creditors in the event of becoming insolvent and entering an insolvency measure during the outbreak, or as a result of.

The measure which has been temporarily put out of action stipulates that if company directors continue to trade while knowing that they are unable to fulfil liabilities, they could be held personally liable for business debts. As a result, businesses would typically be forced to immediately cease trading and as a result, terminate employment contracts and default on loans. If company directors fail to take immediate action, they would run the risk of accusations of wrongful trading which would trigger an investigation into director conduct.

By relaxing this measure, company directors can use the extra breathing space to replenish the business, protect the workforce and recover from the financial effects which continue to damage businesses and the wider economy during the pandemic.

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