Jonathan Geldart

Under current legislation, company boards can be sued for failing to wind up a company if it is running out of money and facing insolvency.

The Institute of Directors (IoD) has therefore asked for such rules to be relaxed to prevent viable businesses from collapse to avoid legal consequences.

The Treasury and Bank of England are offering billions of pounds in loans to businesses to counteract the effects of the pandemic, but the IoD said that directors may hesitate to take them “if they believe that, by failing to declare insolvency now, they may face personal financial and legal liabilities at a later date”.

Under the Insolvency Act 1986, directors can be sued for wrongful trading if they do not put a company into administration or liquidation that is later declared insolvent.

Creditors also can issue winding-up petitions to get their money back if they fear it is being wasted keeping the business going.

The IoD urged that in these extraordinary circumstances, boards should be allowed to continue to run their companies even if technically insolvent as a means of maintaining employment levels and preventing a major economic downturn.

It said that firms should not hesitate to seek government support if their business was a viable concern before the onset of the crisis. In this environment, maximising the ability of creditors to recover funds from a struggling entity after a lengthy legal process is not the economic priority.

The institute said: “Of much greater importance is the need for companies right now to maintain their service levels to the general public and support the economic position of their employees.”

The IoD emphasised further, that it would be entirely inappropriate to allow previously viable companies to go under when the proximate cause of their financial distress are the measures demanded by government – even if they are imposed for the best of reasons. 

Jonathan Geldart, IoD director-general, said: “During the current crisis, directors are facing unprecedented challenges and need to see urgent temporary measures to avert entirely preventable corporate collapses.

“We’re calling on Government to prioritise jobs and the business survival by relaxing existing insolvency obligations put on directors and thereby providing business leaders greater room for manoeuvre at this critical juncture.

“We should not allow a single viable businesses to go to the wall because of this crisis.”