Update on the duty of directors to prevent insolvent trading

Previously we updated members on pre-existing “safe harbour” laws which could have assisted members with setting up a defence to a possible future insolvent trading claim.

Government has now introduced new “safe harbour” provisions, which will apply for 6 months from the commencement date (TBA) in respect of debts incurred in the “ordinary course of the company’s business”.

A company will be taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the relevant period. The Explanatory Memorandum suggests this could include:

• taking out loans; or
• continuing to pay employees.

For example, it would also likely cover debts incurred in respect of:

• a new cleaning regime;
• delivery of food or products; and
• engaging consultants.

The new “safe harbour” is an automatic process providing personal protection for directors from the commencement date.

Despite these new provisions, Henry William Lawyers (insolvency specialists and AHA members) recommends all businesses act early with necessary or desirable restructuring action. Whilst a new defence to insolvent trading may partially address directors’ personal statutory liability concerns, new debt accruing through a period of no trade still may have crippling long term effects if not addressed as soon as possible. Further, this new law will not reduce potential liabilities for directors under personal guarantees. Commercial leverage to negotiate with key third parties will also be at its strongest in the earlier days.