Wrongful trading measures have been temporarily put on hold by the UK government in order to give companies ‘breathing room’ during the coronavirus pandemic and subsequent lockdown.
Wrongful trading laws stop companies from trading while knowingly in debt by the threat of an investigation or even making company directors personally liable for the debts.
The 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.
Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma said: “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.”
Wrongful trading regulations from March 1 will now be applied retrospectively. This period will last for three months.
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.