Directors’ duties and coronavirus (COVID-19)—The risk of wrongful trading when you cannot trade

Directors’ duties and coronavirus (COVID-19)—The risk of wrongful trading when you cannot trade

This analysis looks at directors’ duties, particularly concerning wrongful trading, in the context of companies facing financial difficulties as a result of coronavirus (COVID-19).

The novel coronavirus is already creating significant health, social and economic challenges as governments around the world try to protect their populations and their economies.
The UK Government has ordered the closure of pubs, restaurants, gyms and schools. Shops are closing and the private sector is largely in hibernation. Other European countries have already gone further with strict enforced social distancing and border closures. Globalisation is on hold and countries are on lockdown.
How directors in the UK respond will depend on the nature of their business, their current financial position, and what assistance financiers and the state can provide. It will also depend on how long the coronavirus pandemic lasts for and how long social distancing is maintained, both in this country and abroad. Many businesses will find themselves in financial distress and directors of those companies will need to pay careful consideration to their duties.

When is a company insolvent?

Although there is no definition of ‘insolvent’ in the Insolvency Act 1986 (IA 1986), a company may be wound up by the court if the company is unable to pay its debts.

Under IA 1986, s 123(1)(e) a company is deemed to be unable to pay its debts the company is unable to pay its debts as they fall due (so-called 'cashflow insolvency'). Under IA 1986, s 123(2), a company is also deemed to be unable to pay its debts if the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (so-called 'balance sheet insolvency').

Both tests require a consideration of the company’s present, prospective and contingent liabilities. However, while ‘cashflow insolvency’ is concerned with whether the company is likely to be able to meet its liabilities in the short to medium term, ‘balance sheet insolvency’ requires a longer-term view on whether the company has sufficient assets to have a reasonable expectation of meeting its liabilities. 

Wrongful trading&

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About the author:
Helen joined LexisPSL in 2019, prior to which she was a Professional Support Lawyer at CMS specialising in insolvency and restructuring. She has broad experience in advisory, non-contentious and contentious work, including directorsâ?? issues, formal appointments, security issues and cross border recognition and assistance. She advised on financial institution insolvency and the insolvency of professional partnerships.

Helen trained at Lovells (now Hogan Lovells), qualifying in 2008. She was previously an associate at Lawrence Graham (now Gowling WLG) as well as the commissioning editor of Corporate Rescue and Insolvency journal.