Wrongful trading rules relaxed

The government has temporarily suspended the wrongful trading rules to ease the pressure on businesses. What do you need to know?

Cash flow Ordinarily, directors may become personally liable for a company’s debts if they allow the business to continue trading in the knowledge that it is unable to meet its debts and liabilities. This is called wrongful trading. However, the coronavirus outbreak has caused unexpected cash flow problems for many.

What’s happened? To help all businesses and their directors, the government has announced a raft of support measures. This includes temporarily suspending the wrongful trading provisions retrospectively from 1 March 2020 initially for a period of three months, i.e. until 31 May 2020. This temporary suspension can be extended if necessary.

Practical implications During the three-month window (and any extension that’s applied) trading in the knowledge that your company isn’t able to meet its debts and liabilities won’t automatically mean that it is trading wrongfully and that the directors are personally liable for any debts. Neither will directors automatically risk disqualification.

Debtors first Whilst this is good news, directors of companies that are moving into or already in the wrongful trading zone continue to owe their primary duty to the company’s creditors, not to its shareholders. If a dividend is paid out to a shareholder in preference of a creditor, the amount paid may still be recovered from the director personally. Therefore, don’t pay dividends before debts.

Tip: If your business requires emergency funding it can make an application to the Coronavirus Business Interruption Loan Scheme. It enables businesses with an annual turnover of up to £25 million to access loans, overdrafts, invoice finance and asset finance of up to £5 million. Smaller businesses pay no upfront costs and lower initial repayments. Application details can be found at GOV.UK.

From 1 March to 31 May 2020 your company won’t automatically be classed as “trading wrongfully” if it can’t meet its liabilities. However, debtors still take preference over shareholders so pay bills before dividends.