One of the temporary measures that was not extended was the disapplication of the wrongful trading rules of section 214 of the Insolvency Act 1986 as regards the personal liability of company directors. The discontinuation of the temporary protection has been criticised by business and most recently by the Institute of Directors (IoD) which commented that "Failing to extend the suspension of wrongful trading rules was a mistake. Without this protection, the pressure is on directors to simply shut up shop when faced with difficulty". Is that concern justified?
The 1986 Act provides that a director can be liable for wrongful trading where two conditions are met. First, that the company has gone into insolvent liquidation and secondly that at some time before it did so, the director either knew or ought to have concluded that there was no reasonable prospect that the company would avoid being wound up (section 214(2)(b) and (c)). If the director in question is found liable then they can be asked to make a contribution to the company's assets or otherwise compensate the company in whatever way the court thinks fit.
The test is a hard one on directors, particularly experienced directors because it has both objective and subjective elements to it. It is objective in that the court has to have regard to the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the director. However, the court also looks at the matter subjectively having regard to the general knowledge, skill and experience that that directors has (section 214(4)). Accordingly, an inexperienced director is likely to be held to the objective standard but an experienced director is held to a higher standard as a consequence of their years of experience.
It is important to remember that there is a statutory defence to liability under section 214(3). The defence is that, as at the relevant date, the director took every step with a view to minimising the potential loss to the company's creditors that they ought to have taken. The onus is on the director to demonstrate that they did so. The question that arises is this - what steps could directors possibly take to avoid the losses that their company and, consequently, the creditors would suffer as a consequences of the pandemic and the ensuing government restrictions? That question is asked rhetorically because there will be any number of directors who, because of the nature of the industry that they are in, are unable to do anything to mitigate such losses, no matter how much they would like to do so.
This question is also important in the context of the way in which a director's liability is calculated in the event that they are found to have breached section 214. The director's liability is not measured just by assessing the loss suffered by the creditors. Rather it is "such contribution" to the company's assets as the court thinks proper. While the 1986 Act doesn't specify the criteria that apply in assessing the contribution that should be made and the court is given a wide discretion as to the way in which it approaches it, the English Court of Appeal adopts what must be the right approach in Morphitis v Bernasconi  EWCA Civ 289 in relation to the related offence of fraudulent trading. In that decision the court holds that "There must…be some nexus between (i) the loss which has been caused to the company's creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company's creditors share in the liquidation".
The court gives an obvious example where the company's assets have been misapplied or misappropriated and an order is made for a contribution to the value of the relevant assets. However, where the loss is not primarily caused by the conduct of the directors but is caused by the pandemic and government restrictions and there is nothing that the directors could have done to mitigate or minimise these losses, the case for a contribution by the directors is far less obvious. If, of course, directors gleefully continue to incur debt without a care in the world when they know that the company will never be able to repay it then that is a fraud and the fraudulent trading provisions (which have never been suspended) will catch that conduct. However, if company directors are taking advice and trying to work through the current period in the cautiously optimistic hope that they can turn the company around in the coming months then the application of the wrongful trading laws to that conduct will be very difficult, the liability of directors may be more limited than they think and the discontinuation of the wrongful trading suspension may not have the impact suggested by the IoD.