Thirty-Fifth Report of Session 2019-21 Contents

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Appendix 1

S.I. 2020/1349

Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020

1.In its letter to the Department for Business, Energy and Industrial Strategy of 9 December 2020, the Committee requested a memorandum on the following point:

In relation to the requirement in regulation 2(1) (which replicates section 12(1) of the Corporate Insolvency and Governance Act 2020) for the court making a determination for the purposes of section 214 or 246ZB of the Insolvency Act 1986 “to assume that the [director of a company] is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period”, explain whether the assumption is intended to be absolute, or whether it is intended to be capable of being rebutted by evidence that the financial position is worsened as a result of behaviour, events or factors other than COVID-19.

2.The Department confirms that the assumption the court is required to make by regulation 2(1), that the director of a company is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period, is intended to be absolute.

3.The Department considers that the drafting of regulation 2(1) gives a clear, unqualified direction to the court that it “is to” assume that a director of a company is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period. This reading of the regulation is consistent with the legislative purpose, which is to provide certainty for directors of a company in financial distress that trading during the relevant period will not render them liable for any wrongful trading, even if doing so in normal circumstances might render them so liable. If regulation 2(1) were read so that there were a rebuttable presumption, that would undermine that legislative purpose.

4.Further, in ordinary circumstances, liability for wrongful trading under sections 214 and 246ZB of the Insolvency Act 1986 only arises if the liquidator or administrator can show that the company is worse off on a net basis as a result of the director deciding to continue trading. As such, if regulation 2(1) were to be read so that there is a rebuttable assumption as well as the existing evidential test, it would be nugatory drafting, as it would have the same effect as sections 214 and 246ZB. That is, the liquidator or administrator must present the court with evidence that the director is responsible for the worsening of the financial position to satisfy sections 214 and 246ZB. The liquidator or administrator must then present further evidence that the director was the cause of that worsening rather than it being an effect of COVID-19 to rebut the assumption in regulation 2(1). Given that a reading of regulation 2(1) as creating a rebuttable presumption would have this nugatory effect and having regard to the presumption that Parliament does not legislate in vain, the Department contends that this is a further reason why the provision would not be read in that way.

Department for Business, Energy and Industrial Strategy

14 December 2020