End of wrongful trading restrictions won’t drive up insolvencies

Claims that the end of wrongful trading restrictions will be responsible for a spike in insolvent liquidations has been dismissed by one of the UK’s top insolvency practitioners.

In June, the Government introduced emergency coronavirus legislation that introduced a suspension of a directors liability for wrongful trading applying from 1st March to 30th September 2020.

This meant that directors were initially able to trade an insolvent company through the Covid-19 pandemic without any recourse under the wrongful trading provisions  thanks to restrictions introduced under the Corporate Insolvency and Governance Bill.

However, with these measures having now been lifted, some quarters of the business community have expressed concern this could spark mass insolvencies.

However, Ian Defty, Partner at CVR Global, believes that the lifting of restrictions will have minimal impact on firms that are currently struggling.

He said: “The suspension of wrongful trading may have given directors peace of mind during a difficult period, but the reality is that even if wrongful trading had not been suspended, the courts would have taken into account the difficult times that companies are currently having to trade through.

“For example, those seeking to prove wrongful trading against a director still have to prove that the business they’re claiming against would have failed regardless of Covid-19, which is a very difficult task in any event, and, therefore, would be highly unlikely to pass through our courts which are probably the best in the world in dealing with insolvency matters.

“There will undoubtedly be a wave of corporate insolvencies over the coming months – with the industry bracing itself for cases that could run into the tens of thousands – but this is more likely to be driven by those companies that have only been able to carry on operating because of government support.

“This support is now being phased out and the withdrawal of the wrongful trading suspension should only be of concern to those directors who have ran their companies to the detriment of its creditors.”