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Davidson Chalmers Stewart | Lawyers. For Business.

Businesses are coming under enormous strain and it is not going to be easy for some to keep going. The Chancellor has unveiled significant support, including the ability to obtain cheap loans and furlough staff, aiming to relieve cashflow pressures but it is not clear whether this, along with the other measures taken, will be sufficient to convince businesses not to shut their doors. Directors need to understand their duties in these difficult days to help them to make the right decisions.

While a Company is solvent, each director, executive and non executive, owes duties to it.  In particular, they must promote the success of the company for the benefit of all of its shareholders. That emphasis changes at the point at which the company is approaching insolvency. In usual circumstances, if a company becomes insolvent, or is at risk of insolvency, directors must put the interests of creditors as a whole before those of shareholders. However, in light of the current pandemic the government has announced pragmatic steps to provide relief with changes to the legislation. The changes have not yet come into force but emergency legislation bringing in the changes should pass shortly. This legislation will introduce a temporary suspension placed on the wrongful trading provisions applying retrospectively from 1 March 2020.

The suspension is a welcomed change which will give company directors greater confidence to use their best endeavours to continue to trade during the emergency and unrest caused by the outbreak of Covid-19. The suspension of such rules means that directors can continue to trade without the threat of personal liability should the company ultimately fall into insolvency and will help to avert corporate collapses.

This move helps to protect companies weakened by the impact of Covid-19 whilst assisting directors in accessing government or bank funding without concerns of personal liability. This move will allow directors of companies to pay staff and suppliers even if there are fears that the company could become insolvent, ensuring that directors are not penalised for doing all that they can to save companies and jobs through this turbulent period. Alok Sharma, the UK business secretary, said the move would allow companies to “emerge intact on the other side of the Covid-19 pandemic”.

Existing laws for fraudulent trading and the threat of director disqualification will remain in force as a deterrent against director misconduct.

Fraudulent trading, a more serious offence, occurs if it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose. It is necessary to show that a company continued to carry on business and to incur debts at a time when there was, to the knowledge of the directors, no reasonable prospect of those debts being paid. Fraudulent trading is a criminal offence, punishable by a fine or imprisonment.

Assuming directors can justify their decision to continue trading then they should do so. As the Chancellor has pointed out it is in everyone’s interest that businesses survive through this situation.

Information correct as at 30th March 2020

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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