The test is a particularly stringent one because it has both objective and subjective elements to it. The first part of the test that the court applies is objective. It takes into account the "general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director". The second part is subjective where the court takes into account "the general knowledge, skill and experience that that director has". In other words, if you are an inexperienced director then you are still held to the objective standard. If, on the other hand, you have years of experience as a director and have dealt with recessions and economic problems before, then you are held to a higher standard.
So in theory the proposed suspension of wrongful trading will mean that directors don't need to worry about trading when they "knew or ought to have concluded" that their business was insolvent. It is rather difficult, however, to see how that will be the effect in practice. If we take a simple example. A director of a small business knows that her business is insolvent. The balance sheet shows that its assets are exceeded by its liabilities and it is unable to pay its debts. She knows that the company can't continue. But she keeps trading. She keeps incurring debt, including rent and tax liabilities which she knows the business will never be able to pay. Does the suspension of wrongful trading protect her from personal liability when the business actually enters into formal insolvency?
It seems to me that the answer is "no". It is important to bear in mind that she is still bound by the usual directors' duties under the Companies Act 2006 and is still under a duty to put the interests of creditors first where her business is in an insolvent position. Further, while the wrongful trading provisions of the 1986 Act are suspended, what she is doing is a fraud against the creditors and creditors are protected both at common law and by statute under the fraudulent trading provisions of section 213 of the 1986 Act, which are not suspended. Fraudulent trading is, of course, more difficult for an insolvency practitioner or a creditor to prove and the burden of proof is on the pursuer (as opposed to on the director as with wrongful trading). Depending on how serious her conduct is, she may also risk disqualification under the Company Directors Disqualification Act 1986. Again, the provisions of that Act are not suspended and while the Secretary of State may be encouraged to be lenient on directors' conduct during the current crisis, there is no guarantee of that.
Accordingly, the effect of the suspension of wrongful trading is unlikely to be particularly significant. Where a director knows that their conduct is wrong and keeps doing it anyway, their conduct may well be caught under other statutory or common law controls. It is really only where the conduct of the director is as a result of a lack of understanding of the financial position of their company and they ought to have known better, that the relaxation of the rules will have any effect. In other words, it is where the director didn't know that their company was verging on insolvency but "ought to have concluded" that it was, that the relaxation will have an impact. Even there, however, the impact of the suspension of the rules may not be as significant as hoped. Optimistic trading, where a director keeps going in the hope (rather than legitimate expectation) that their business is going to be saved is already outwith with the scope of section 214.
The point of all of this and the example given above is that directors have to be careful to avoid thinking that the suspension of wrongful trading is a carte blanche for ignoring their responsibilities and their duties to creditors. On the contrary if any business is continuing to trade while insolvent, even during the current crisis, the directors must take advice and very carefully document all of their decisions at board level and the reasons for these decisions. If they are challenged in court in future, it will be crucial to be able to demonstrate that decisions were carefully thought through and that creditors' interests were taken into account.
