Wrongful Trading Actions suspension: what does this mean for the retail sector?

We explored this move in a previous blog. The temporary suspension of these actions has, however, been reintroduced for the period from 26^th November 2020 to 30^th April 2021 with the possibility of further extensions, under the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations.

What does this mean for directors in the retail sector?

The retail sector in the UK has been hit particularly hard by the Coronavirus pandemic, and subsequent government measures aimed at controlling the spread of the virus, forcing the intermittent closure of non-essential shops since March 2020. Whilst support has been afforded to companies in the form of the Coronavirus Job Retention (“Furlough”) Scheme, grants for forced closures, VAT holidays and reductions, and certain government backed ‘bounce-back’ loans, large overheads for commercial tenants in the form of amounts due under the terms of their leases (including rent and service charges for example) have had a detrimental impact on the balance sheet position of a large number of retail businesses.

As such, whilst the reintroduction of the suspension of these actions will afford a level of comfort to directors, particularly those directors of companies that are commercial tenants in the hard-hit retail sector, the relinquishment of the risk of wrongful trading actions does not in itself mean that directors are “off the hook” if the company subsequently becomes the subject of insolvency proceedings. The reasons for this are set out in more detail here, but can be briefly summarised as follows:

• If there is an element of actual dishonesty in the actions of a director, then they may still face actions being brought against them for fraudulent trading under section 213 of the Insolvency Act. This may capture directors who seek to conceal the true financial status of the company in an effort to continue to trade where there is no feasible prospect of recovery.
• Directors are still bound by their wider duties owed to the company and its shareholders, which could, if breached, culminate in a misfeasance action being brought against them.
• Courts have discretion to disqualify directors under Company Directors Disqualification Act 1986 for varying lengths of time depending on the conduct of the directors in question.
• Directors may need to account for the value of assets which are sold in the period up to entering into insolvency if it can be shown that these assets were sold on a preferential basis to a connected party or company for example.
• Directors may still be accountable by virtue of any personal guarantees they have given under lending arrangements. The giving of personal guarantees are also relatively common in the context of commercial leases.
• Actions for wrongful trading can still be brought against directors for their conduct between 30^th September 2020 and 26^th November 2020.

It would therefore be wrong for directors to continue to trade whilst their company incurs losses without giving due consideration to the above.

What should directors in the retail sector be doing?

The guidance remains that directors should be following the rules and duties set out in the Companies Act 2006, and clearly sign-posting compliance with these duties where relevant in the board minutes confirming ratification of any decisions. Holding frequent board meetings, maintaining transparency with shareholders, and regularly monitoring the financial performance and outlook of the company also remain key.

If they are not doing so already, directors of retail companies would also be well advised to approach the landlords of their stores to request a rent payment holiday or reduction whilst stores remain closed. Many retailers and landlords have already agreed such measures in an attempt to ensure their mutual survival. Where arrears have already accrued it would be prudent to try and agree a repayment plan now; in our experience landlords have been amenable to tenants paying off arrears over an agreed period as the request to do so illustrates that the tenant is planning for the future rather than “burying its head in the sand”. There are of course retail companies who are continuing to build up arrears of rent and not actively considering how they will be paid off (and this has been enabled by the government’s extension of the ban on evicting commercial tenants to 31^st March 2021 at the earliest, and the Moratorium process introduced by the CIGA); it is the directors of retail companies who are simply avoiding the problem that are most at risk of being personally liable for the mismanagement of their companies. As difficult as it may be directors must take action rather than simply waiting for the inevitable to happen.

If your company has a portfolio of stores you would also be well advised to carry out an audit of lease expiry dates and break options so that you have a plan to exit stores which are less profitable or which may now be less attractive to customers (given the trend towards more local high street shopping in place of town centre shopping centres). If you have the option to terminate leases then you should consider asking your solicitors to serve any necessary notices for you in order to bring liabilities to an end as soon as possible. Again, the key here is for directors to focus on what they can do and explore other options, rather than simply avoiding the problem until they are forced to confront it.

If you are concerned as to how these rules may affect you, or more generally, as to the solvency of your company, you should seek professional advice aimed at reviewing whether insolvent liquidation is inevitable or whether there is some way of resolving or mitigating the company’s financial difficulties.

If you have any concerns as to the solvency of your business and your potential liabilities, please feel free to contact RWK Goodman’s dedicated insolvency specialists.