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Following the recent announcement by the Government that it proposes to amend UK insolvency law in the wake of the economic issues arising from the coronavirus pandemic, we are now seeing reports that the major banks have agreed to suspend dividend payments following a request by the Bank of England. Most of the big banks appear to have agreed to this, which is a sensible step, not least from a PR perspective – it would be difficult for banks to justify paying billions out to shareholders at a time of national crisis, particularly when many businesses around the country are struggling to come to terms with the financial impact of the virus.

It remains to be seen whether other businesses will follow suit and refrain from paying dividends to their shareholders for the time being. However it is worth bearing in mind that whilst it is the Government’s intention to relax the wrongful trading rules, this is not the only aspect of the Insolvency Act 1986 (IA 1986) whereby directors can find themselves personally liable in the event of a company’s insolvency.

Directors would be well advised to ensure that they continue to comply with their overriding duties to the company and, if insolvency is on the horizon, to creditors. In relation to dividends, if directors are considering whether to authorise distributions to shareholders they would need to carefully consider whether such payments are in the company’s (or creditors’) best interest, particularly in the current circumstances. If dividends are paid at a time when the company is facing insolvency (regardless of coronavirus), then the relaxation of the wrongful trading rules will not necessarily absolve the directors of liability. If the company ultimately enters liquidation then the liquidator may challenge such payments as an act of misfeasance under s.212 IA 1986. This is a deliberately broad type of claim that encompasses any conduct by a director that causes harm to the company, the penalty for which is personal liability for the director concerned. Indeed, so wide is the reach of s.212 that it can capture a general failure by directors to procure that the company pays its creditors, in particular HMRC.

In this regard directors should bear in mind that the wrongful trading regime is only one tool in the insolvency office holder’s armoury, which not only includes misfeasance claims but also fraudulent trading under s.213 IA 1986, claims under the Companies Act 2006 (for example for unlawful dividends), transactions to defraud creditors under s.423 IA 1986 and common law claims such as breach of trust. In addition there are also potential claims that can be made by third parties, for example HMRC (they are for example currently still able to issue personal liability notices against directors in relation to non-payment of NI contributions), creditors (who can also bring claims under s.423), and the Official Receiver (the directors’ disqualification regime remains unchanged).

Therefore whilst the relaxation of the wrongful trading rules may provide some comfort to directors, it most certainly does not give them carte blanche to act in a way that conflicts with their duties to shareholders and creditors.

That said, with careful management and advice it is possible for directors to avoid these elephant traps. For directors who take advice and exercise proper planning and considered decision making, and ensure that decisions are well documented and explain the reasons why actions were taken, the relaxation of the wrongful trading rules will be of little relevance.

Edwin Coe is well placed to advise directors on their duties when the company is solvent or approaching insolvency, and also if they are being pursued by insolvency office holders. To discuss any of the issues raised in this blog please contact Simeon Gilchrist, David Fendt or any member of Edwin Coe’s Restructuring & Insolvency team.

For our updates on the legal implications relating to the Coronavirus (Covid-19), please see here.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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