Finance & law, Finance

Removal of wrongful trading provision

Good news for trustees worried about trading insolvently during the COVID-19 crisis.

On Saturday 28 March some of you may have heard the Business Secretary, Alok Sharma, announce that the government is removing the ‘wrongful trading provision’ contained within the Insolvency Act for 3 months from the 1 March 2020.

Some of you I’m sure, like me, weren’t exactly clear about what this means for charities. But it is very helpful news.
The term ‘wrongful trading is used to describe when the directors of a company have continued to trade a company or charity past the point when they:

  • knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation (ie, going out of business with not enough cash to meet their debts); and
  • they did not take every step with a view to minimising the potential loss to the company’s creditors (in other words, putting aside cash to meet creditors bills before going bust).

For charities that are also registered as companies this provision also applies to them. So, simply put, it means that trustees of charities who are also the members/directors of the company must not continue to trade when they know that their organisation can no longer pay their bills when they’re due or when their liabilities outweigh their assets.

However, right now, many charities are accumulating debt whilst trying to still function and being unsure of when their revenue lines will recover. Under normal circumstance trustees would, and indeed probably should, decide that they ought to close down rather than risk being prosecuted under the wrongful trading provision.

But this change means that you don’t have to worry for the time being. The government is basically trying to encourage businesses, and therefore charities, NOT to close down because they’re worried about debt but to keep going as long as they can to give themselves a chance to recover.

Although we’re still awaiting some more guidance from the government regarding its announcement, from a risk perspective the temporary removal of this provision should give Trustees more confidence to continue operating during this emergency period without the threat of personal liability.

Do bear in mind that all other checks and balances that help to ensure directors fulfil their duties properly remain in force.

Legislation will be put in place “in due course”, and applied retrospectively to the beginning of March. We’ll share details of that when we have it, but in the meantime you can read the FT coverage of the announcement here.