Covid-19: What next in Jersey - should I be worried about wrongful trading?
25 March 2020
The UK Government announced stringent measures yesterday to reinforce the effectiveness of social distancing for a three week period, albeit that they may be extended for a longer period.
There is no reason to think that the Government in Jersey is going to do anything different so we face the real possibility, in the very near future, of almost all non-essential-businesses having to close.
Businesses face a serious challenge in the current crisis. Many are practically unable to trade; whilst hopefully they have a reserve of cash, if trading conditions do not improve at some stage, there will inevitably come a point when that reserve is insufficient to meet all of their usual expenses. None of this is new. However, if businesses are thinking of laying off staff (and that is the last thing they probably want to do), they will also have an obligation to give, and to pay, a notice period, the costs of which can be quantified now.
What happens when the cost of giving that notice period equals or exceeds the amount of the cash reserve in the business?
The received wisdom is that if a company director continues to trade knowing that there was no reasonable prospect that the company would avoid bankruptcy, they can be personally liable for the debts or liabilities of the company (under article 44 of the Bankruptcy (Désastre) (Jersey) Law 1990 and article 177 of the Companies (Jersey) Law 1991).
At this early stage of the crisis, whilst governments around the world are trying to deal with the physical and financial consequences of Covid-19, and new measures are being announced every day, there are good grounds for saying that in relation to the vast majority of businesses, anything is possible. So from a legal perspective, it is far from clear that the trigger condition applies; businesses may be rightly concerned about the future but that is not the same thing as "knowing that there is no reasonable prospect of avoiding bankruptcy".
Even if that concern continues to grow, that is still not sufficient to make a director personally liable. Both statutes provide that personal liability shall not be ordered if the director took reasonable steps with a view to minimising the potential loss to the company’s creditors. The question here will be as to what the director believes, and what is reasonable. In our view, taking decisions in the midst of a crisis which everyone says is "unprecedented" is far from easy. When looked at after the crisis has abated, there is likely to be a significant degree of latitude afforded when determining what was, or was not, reasonable.
So for directors, know your business, look at your options and revisit your plans. Early advice (whether from accountants and/or lawyers) is important but given all of the other potential adverse consequences of this pandemic, we think that the risk of wrongful trading should not be high on the list for those directors genuinely doing their best in difficult circumstances.