Author: Jagdeep Sandher

In the last blog post on this topic we discussed the effects of the government suspension on wrongful trading under section 214 and 246Z insolvency Act 1986 and the pitfall under section 172(3) Companies Act 2006.

We suggested that the suspension, although welcome, should be taken with caution as a result of section 172(3). There are a number of other provisions within the Insolvency Act that Directors should be cautious of, these are:

1. Misfeasance – section 212 of the insolvency Act 1986 provides a liquidator a summary remedy in the liquidation of the company, thus allowing it to seek the restoration of company property or funds and assess compensation or damages against its previous directors.

Misfeasance is a broad concept and encompasses the following:

• The retention and or misapplication of company funds or property;
• Becoming accountable for property or funds that belong to the company;
• Being in breach of your fiduciary duties to the company (sections 170-177 Companies Act 2006).

The Companies Act 2006 states that directors duties are generally as follows:

• • To act within powers.
  • To promote the success of the company.
  • To exercise independent judgment.
  • To exercise reasonable care, skill and diligence.
  • To avoid conflicts of interest.
  • Not to accept benefits from third parties.
  • To declare an interest in a proposed transaction or arrangement.

2. Fraudulent Trading – these rules can impose a civil liability on directors where it evident that the business of the company has been carried out so as to defraud company creditors, creditors of any other person or for any other fraudulent purpose. It should also be noted that this is a criminal offence.

The offence is committed by anyone who is knowingly party to the carrying on of the business and can extend to non-directors and third parties also. To evidence this, a person must have taken steps in the carrying on of that business.

An intention to defraud creditors occurs where a director or others do things that he knows will result in the existing creditors not being paid e.g. dissipating assets for less than their worth so creditors cannot be paid. It could also be where someone is induced to become a creditor where they were not already so at a time where the company is or is likely to become insolvent, e.g. purchasing goods on credit who are unaware of the state of the company’s finances.

3. Office holder claims – these claims relate to transactions made by a company before it enters administration or liquidation whilst it is insolvent (transactions at an undervalue and preferences). The Court has the power to make an order restoring the position as if the company had not entered into the transaction. The court could also order that he director be personally liable to compensate the company if the transaction was entered into where he was also in breach of his directors duties under the Companies Act 2006 (see above).
4. Transactions Defrauding creditors – if a transaction at an undervalue or a gift is made section 423 Insolvency Act 1986 allows an insolvency officer or a victim of the fraud to seek the Courts intervention to unwind the transaction if it was entered into to put assets beyond the reach of the creditor. This could also be deemed a breach of directors duties and as such a Director could be held liable personally.

As can be seen, it is certainly not plain sailing and although the headline grabber may give you some cause for comfort you should still be cautious in entering in to any transactions that could be called into questions at a later date.

*This blog is intended to provide the reader with a general understanding of things to consider and should not be relied upon as specific legal advice. Each matter will be fact specific and you should take advice if you are concerned about any of the matters raised in this article.

These are certainly unusual times and no doubt most businesses have been or will be affected by the effects of the lockdown caused by Covid 19. In the past three weeks the government has announced a plethora of measures designed to protect the economy, companies and workers.

As a part of those measures the government has recently announced a number of protective measures in order to provide some protection to companies and their directors that have been affected by Covid 19. A significant measure was that of the temporary suspension of wrongful trading provisions for a period of three months starting on 01 March 2020. Although the detail has yet to be revealed it is certainly some cautiously welcome news to directors at these difficult times. 

As you may know Directors can be held liable for wrongful trading by a court pursuant to section 214 and 246ZB of the Insolvency act 1986. This is triggered where prior to the commencement of insolvency of a company (liquidation or administration) a director knew or should have known that there was no reasonable prospect that the company would avoid going to into insolvent liquidation or entering insolvent administration and did not take every step with a view to mitigating and or minimising the potential loss to the company’s creditors. 

Although the suspension of the wrongful trading rules is generally welcome, directors should still remain cautious. There remain alternative ways that the wrongful trading rules can be triggered, these are:

1. Section 172 (3) of the Companies Act 2006; and
2. Common law duties. 

It must be remembered that these go hand in hand and the common law duty is preserved by section 172(3). This route to triggering a claim has not been suspended, can be triggered more easily than those entrenched in the insolvency act and care should be taken that you are not in breach.

The test under the s172(3) trigger is ‘is likely to become insolvent’ rather than ‘no reasonable prospect that the company would avoid going to into insolvent liquidation or entering insolvent administration’ making it less onerous than the wrongful trading trigger.

Further, the duty under s172(3) will be engaged where a director knows or ought to have that the company is or is likely to become insolvent on either the cash flow or balance sheet basis. Whereas under the wrongful trading trigger a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payments of its debts, other liabilities and the costs of the winding up; i.e. it is balance sheet insolvent. Once again the s172(3) trigger is an easier route to trigger a wrongful trading claim.

There are a number of other related areas that have not been suspended by the government that are of equal importance and these will be discussed in our blog over the coming weeks. 

What can you do?

1. Ensure that you hold regular meetings with directors to discuss the financial position and viability of the company, this of course should be undertaken in line with the governments social distancing recommendations;
2. Keep a close eye on the company’s financial position by regularly reviewing the state of affairs, keeping accurate records and by speaking to your internal and external accountants; 
3. Keep records and meeting minutes of decisions made and why those decisions have been made, it would be a good idea to ensure that any evidence relied upon in coming to that decision is also kept.
4. Talk to your creditors, this may well be to simply touch base with them so that they understand the position of the company, can alternative agreement be reached.
5. Most importantly, you should take appropriate legal, financial and insolvency advice.

*This blog is intended to provide the reader with an understanding of things to consider and should not be relied upon as specific legal advice.

If you’re looking to understand whether this applies to you or your business, please don’t hesitate to contact 01753 486777

What is Force Majeure ?

Force majeure is chance occurrence or unavoidable accident scenario – a  common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract.

The impact of Cornoavirus is and will continue to have a huge impact on business at all levels of the supply chain; and this is predicted to rumble on well after the lockdown comes to an end.

The impact upon all contracts shall be significant and no doubt a  number of disputes will commence on whether a Force Majeure clause can be invoked to excuse either party from performing under its contract on time or at all.

Below we raise a number of points in relation to Force Majeure and whether Coronavirus is classified as a Force Majeure event.

When considering your contracts you need to check/consider for the following?

2. Is there a Force Majeure clause in your contract? If so:
   • How specific is it? i.e. does it list a particular set or number of events that it is limited to; or
   • Is it loosely worded? For example, plague or epidemic which in most circumstances will cover Coronavirus. Or an act of Government, this could include matters pertaining to the lockdown.
   • Does it say that the list is exhaustive or non-exhaustive? This will be key in limiting liability where there is a list of specific events;
   • You may also want to consider whether wording such as ‘beyond/outside the parties reasonable control’, this type of wording is more difficult as it will wholly depend on interpretation and will no doubt be fact specific e.g. was it as a result of the pandemic that you or another party were unable to perform the obligations in your contract? Did you attempt to mitigate?
3. Was it coronavirus and or the lockdown that caused the non-performance or delay?
4. Was it truly outside of your control?
5. What could you have done differently to undertake your performance of the contract? Did you try to mitigate?
6. Are there any mechanisms in the contract that you now need to comply with? E.g. are there any notice provisions that you must comply with? Or, did you check whether you needed to inform your contracting party before the event took place?

The question then arises as to what you can do if you can in act invoke the Force Majeure clause, normally this would mean that you are no longer obliged to comply with any obligations under the contract and therefore not be liable for any damages. There are number of other possibilities but these will of course be contract specific.

It is suggested that if you have been unable or your contracting party has or is unable to perform their side of the contract then you should consider ways within which you could comply. This can either by reducing the scope of the obligations required to be performed or alternatively in delaying the performance of it. No doubt a pragmatic approach will need to be taken by all.

This could also be a good time to extricate yourself from contracts that are no longer commercially viable and this should be considered if necessary. A word of warning here is that increased costs of performance will not be a good reason to delay or not perform; the courts do not like this.

The best way to deal with events that we face is to have sensible discussions about how each party can remedy any non-performance or delayed performance before a dispute arises.

*This blog is intended to provide the reader with an understanding of things to consider and should not be relied upon as specific advice. Each contract is different and applied in different ways to the circumstances; as such you should take specific advice.

If you’re looking to understand whether this applies to you or your business, please don’t hesitate to contact 01753 486777