Business directors must take wrongful trading provisions into account when deciding to bring staff back from furlough. Emma Edis explains
My restaurant chain is at risk of insolvency. I am worried that if I take staff back from furlough and my staff costs increase, I could be personally liable for that additional cost. Yet if I don't bring staff back from furlough, the business won't survive.
If a director knows (or ought to conclude) that there is no reasonable prospect of their company avoiding insolvent liquidation, but their company continues to incur liabilities, then the director may be personally liable to contribute to the assets of the company to the extent that the company is worse off as a result of that continued trading. Known as wrongful trading provisions, this law is stated in Section 214 of the Insolvency Act.
Due to coronavirus, wrongful trading provisions under the Insolvency Act were suspended for an initial six-month period, from 1 March to 30 September. Unfortunately, this suspension has not been extended.
If your company is (or is at risk of becoming) insolvent, the law will prioritise the interests of your creditors to ensure they aren't left out of pocket. As a result, the accountability of directors increases. The current economic unrest has left many businesses at risk of becoming insolvent, with directors facing tough choices.
On one hand, the government is encouraging businesses to continue trading, access new funding and continue to employ staff. On the other, wrongful trading provisions act as an opposing force, encouraging businesses to minimise loss to creditors which, for many in the hospitality industry, potentially means not bringing back or hiring staff. This is understandably confusing and potentially very unjust to directors.
In the case of a restaurant chain, for the period of trading up to 30 September 2020, directors were protected to some extent against being held personally liable for any resulting increase in costs. The suspension of wrongful trading provisions enabled company directors to continue trading, and to continue to pay staff and suppliers in the usual way, even if they appear to be nearing insolvency.
However, now the wrongful trading suspensions have come to an end, if a business is at risk of going insolvent, then they should think very carefully about incurring additional liabilities, and this includes bringing staff back from furlough or hiring additional staff.
If there is no reasonable prospect of your business avoiding insolvency, then you should not be taking on any additional liabilities, and this includes hiring staff or bringing employees back from furlough.
For any additional liabilities, including staff hires, you incurred between 1 March and 30 September, you may be protected under the suspension of wrongful trading provisions for any personal liability for these costs.
Even though the suspension of the wrongful trading provisions has offered much-needed relief from March to September this year, it is important that directors don't lose track of their remaining duties, including the rules regulating fraudulent trading and a director's usual fiduciary duties, breaches of which could lead to both civil and criminal action (punishable by imprisonment or a fine), an disqualification as a director.
Emma Edis is a specialist in business employment law at Moore Barlow email@example.com
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