3 minute read
Wrongful Trading rules
Wrongful Trading rules: what do you need to know?
The temporary suspension of wrongful trading rules for company directors earlier this year offered a lifeline to help sports clubs combat the financial impact of the coronavirus crisis. Paul Atkinson, restructuring partner at specialist business advisory firm FRP, explores what will happen when that respite passes, and provides advice to club directors to ensure they continue to act sensibly and cautiously.
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Sports club directors are continuing to face unprecedented challenges and decisions as a result of the COVID-19 pandemic, with live matches cancelled, revenues have dried up. So for many, the temporary suspension of rules about wrongful trading, was widely welcomed.
Standard wrongful trading rules mean that directors can face personal liability if they continue to trade in the knowledge that the club is unable to remain solvent. It can mean potential disqualification as a company director for up to 15 years, as well as other financial fines and penalties.
And, although it’s not considered a criminal offence, wrongful trading is a civil offence which is taken very seriously by the courts. If sports club directors are found guilty of wrongful trading, they can be held personally liable for the club’s debts from the point
they knew it was insolvent, disqualified as a director, fined or even imprisoned.
So with increasing numbers of directors becoming increasingly concerned about the solvency and viability of their club as a result of COVID-19, this change, which was initially introduced from 1 March 2020 for a three month period and later extended to 30 September, has given directors increased flexibility in the event that they have to face difficult decisions to secure their club’s future.
Without this temporary suspension, some directors could have been placed in a difficult position and may have been forced to begin insolvency proceedings in respect of the company in order to avoid personal liability. During the suspension, directors have been able to continue to pay employees and suppliers without risk of personal liability should their business later become insolvent – effectively giving them a greater chance of emerging intact from the COVID-19 pandemic.
This was a significant shift, but the hiatus is soon scheduled to pass, and directors still have much to consider.
Now as much as ever, it is essential that sports club directors continue to remain mindful of their obligations and duties which are outlined in the Companies Act 2006. When the suspension passes, some directors will find themselves facing difficult decisions as to whether their sports club should
keep trading and this means they should question whether taking on new debt or new liabilities in order to stay solvent now, will really benefit the club in the longer-term.
They must continue to act responsibly and reasonably to protect the club’s value and minimise loss, and carefully evaluate whether continuing to trade is in accordance with their wider duties as directors. Any decisions to continue trading should consider the impact on the club’s stakeholders and directors
must continue to hold regular board meetings and keep detailed and accurate minutes as evidence that they’ve dutifully considered creditors’ interests.
It’s important to remember that the temporary suspension of the wrongful trading rules is simply intended to provide a buffer so that directors who act in good faith in the current climate are not unduly penalised. A good director will always err on the side of caution and take a conscientious and responsible approach to their duties.
ABOUT FRP
FRP Advisory Trading Limited, which is a whole owned subsidiary of FRP Advisory Group plc, provides a professional and considered approach to problem solving. With 56 partners and more than 400 staff operating from 18 offices across England and Scotland, FRP is one of the UK’s largest independent business advisory firms specialising in corporate restructuring, corporate finance, forensic services, pensions advisory and debt advisory. It has a strong reputation and track record for creating, preserving, and recovering value across a range of complex situations. Its advisers work at board level, with investors, lenders, government and regulatory bodies, plus other professionals and individuals requiring professional support. FRP provides a wide range of services, as well as specialist industry experience to enable the delivery of sector specific solutions.
