Alok Sharma, the UK government's Business Secretary, recently announced significant changes to UK insolvency law in light of the COVID-19 outbreak. These changes, which are intended to protect businesses in what are clearly difficult economic times, pose understandable questions for jurisdictions with insolvency regimes that are modelled on the UK's and who face similar economic challenges, but may not have seen equivalent emergency legislation.
In this regard, it is noteworthy that the UK has temporarily suspended its wrongful trading rules, which ordinarily prohibit businesses in serious financial distress from continuing to trade, in order to help directors keep their businesses going without the threat of personal liability.
We look below at the current wrongful/reckless/insolvent trading regimes in BVI, Ireland, Guernsey and Jersey and provide some practical guidance for directors of companies in those jurisdictions, which are yet to adopt the UK (and Australian) Government's approach of a relaxation of the rules in this area. Please refer to our previous note on current considerations for directors - here
The BVI Court may (upon the application of a liquidator) make an order against a director or former director of a BVI company if at any time before the commencement of the liquidation, that director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
However, no order shall be made against that director if the Court is satisfied that at the relevant time, the director took every step reasonably open to them to minimise the loss to the company's creditors.
In determining what a director ought to have known, what conclusions they ought to have reached, and the steps reasonably open to them that they ought to have taken, the Court will evaluate what a reasonably diligent person would have known and done having both:
the general knowledge, skill and experience that may be reasonably expected of a person carrying out the same functions as the director; and
- the general knowledge, skill and experience the director actually had.
- Should the Court find that the director did not act appropriately, it can order the director to make a contribution to the company's assets.
There exists a concept of personal liability for directors for reckless trading (as well as fraudulent trading) in Ireland. A director of a company in liquidation or in examinership (a rescue process) can be held personally liable (without limitation of liability) for a company's debts if found liable for reckless or fraudulent trading by an Irish court.
Reckless trading is the equivalent to wrongful trading and as a matter of Irish law, an officer of a company will be deemed to have been guilty of reckless trading if: (a) they were party to the carrying on of business which they ought to have known, having regard for their general knowledge, skill and experience, would cause loss to the creditors of the company, or any one of them; or (b) they were party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt as it fell due.
Civil liability for wrongful trading may arise in Guernsey if the Court is satisfied that i) at some time before the commencement of winding up proceedings a director knew (or ought to have concluded) that there was no reasonable prospect of avoiding insolvent liquidation and ii) from the moment a director knew (or ought to have known) that insolvent liquidation could not be avoided, he or she failed to take every step they should reasonably have taken with a view to minimising the potential loss to the company's creditors.
For the purposes of determining what a director knew or ought to have known, what conclusions they ought to have reached and the steps that ought have been taken, the court will have regard to the director's actual skill, knowledge and experience and the skill, knowledge and experience that may reasonably be expected of someone in that director's position.
Where liability is established, directors may be ordered to make personal contributions to the assets of the company.
Wrongful trading arises where a current or former director knew before a creditors' winding up has commenced that there was no reasonable prospect of the company avoiding a creditors winding up or désastre (bankruptcy) declaration or, on the facts known to him was reckless as to whether the company could avoid a winding up or declaration.
A liquidator may apply for an order that the director is to be held personally responsible, (without limitation of liability), for all or any of the debts or other liabilities of the company arising after the time the director knew or should have known there was no reasonable prospect of the company avoiding a creditors winding up or désastre declaration or was reckless to this. The Court will not make a liability order if it is satisfied that the director took reasonable steps with the intention of minimising the potential loss to creditors.
Approach in the current climate
With the significant pressures currently being placed upon the Governments and their legal departments in each of the jurisdictions, but particularly in Guernsey, Jersey and the BVI, it seems unlikely that similar emergency legislation will be enacted in the short term, although undoubtedly views and assistance in any consideration of this area will be given by relevant professional bodies. Naturally there is a balance to be struck between assisting genuinely motivated directors to keep businesses afloat during these difficult conditions and what are are also credible arguments for maintaining the status quo as regards wrongful trading and avoiding affording what some might see as carte blanche to opportunist directors with improper motives. For so long as the lockdowns continue, one can easily foresee, despite Governments' clear commitment to support local businesses, further cause for concern amongst directors of small businesses who maintain a strong (and laudable) desire to retain staff and meet wage bills despite cashflow having all but dried up.
We reach the point at which practical steps gain greater relevance and have identified a number of issues that directors may want to keep at the forefront of their mind over the coming weeks. These include:
- The need to properly minute all significant decisions, and the basis upon which those decisions have been made, in order to evidence that proper consideration has been given to all relevant issues. This should be done contemporaneously.
- The merits of keeping the company's cashflow under continuous and close review in order to identify potential problems as soon as possible.
- Giving early consideration to the benefits and protections afforded by an administration (Guernsey) or examinership (Ireland) process (which would provide the company with a moratorium on claims – other than in Guernsey those of secured creditors - against the company or any winding up order being made and allow for the potential survival of the company as a going concern). Whilst administration is not available in Jersey or BVI, in all of the jurisdictions, schemes of arrangement are and which might also prove to be a way to achieve survival in the face of creditor pressure.
- Increasing the frequency of board meetings in order to permit a regular and critical review of the company's financial position.
- Considering the benefits of a regular dialogue with shareholders and creditors (each of whom may apply to place a company into liquidation or seek wrongful trading remedies against directors).
- Having consistent regard to obligations to creditors (including any new creditors) and, should the company reach the 'zone of insolvency', ensuring that creditors' interests are given paramount consideration when making any further business decisions.
Our hope is that these pragmatic and prudent steps will provide assistance to directors of companies in the four jurisdictions who are managing businesses of all kinds in unchartered territory, to ride out the current period of uncertainty.
Originally published 13 May, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.