From 1 July 2021, directors in the UK could be subject to a wrongful trading claim if their company goes into liquidation or administration.
This means that directors may be personally liable to contribute to the company’s assets:
- if at some time before the start of the winding up or administration the directors knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent winding up or administration, and
- after such time, they failed to take every step a reasonably diligent person would take with a view to minimising the potential loss to the company's creditors.
What steps should directors be taking?
Here are a few practical steps that directors should take to minimise loss to creditors and mitigate the risks that they face:
- Maintain detailed financial forecasts so that the financial position and viability of the business can be accurately evaluated. Identify potential liquidity issues and ensure that no creditors are given preferential treatment.
- Hold regular board meetings and keep detailed records of board decisions, include an analysis of the finances and explain why a decision to continue to trade was made.
- If the company is in financial difficulty, seek advice on contingency options early on. If there is no reasonable prospect that a company can avoid insolvent liquidation or administration, directors should take advice on the commencement of a formal insolvency process such as an administration or liquidation.
- If there is a reasonable prospect that a company can avoid insolvent liquidation or administration, there are a range of options available to facilitate the restructuring of the business. These include two new measures introduced by the Corporate Insolvency and Governance Act 2020, the restructuring plan and the standalone moratorium (see our update for more).
Find out more
To discuss these options in more detail please reach out to a member of our Restructuring & Insolvency team.