A temporary suspension of wrongful trading rules could lead to abuses of the insolvency system, a leading north-east accountant has warned.
Michael Reid, managing partner at Meston Reid & Co, of Aberdeen, said unscrupulous company directors may seek to take advantage.
Previously, directors of limited liability companies could become personally liable for debts of a business if they allowed it to keep trading despite knowing it was heading for either administration or liquidation.
If there was no reasonable prospect of the company avoiding insolvency, directors had a duty to take every step to minimise potential loss to creditors.
But, on March 28, these wrongful trading provisions to the rules governing insolvencies were temporarily suspended for three months.
The UK Government said the change applied retrospectively from March 1 2020, and was in response to the Covid-19 crisis.
It argued the suspension would help directors to keep businesses going and incur additional debt, including under the new government funding initiatives, without the threat of potential personal liability in respect of wrongful trading should companies, ultimately, fall into insolvency.
Mr Reid said: “Lifting such a worry for directors at a time when the primary focus for many is on survival would – at first glance – appear to be a sensible course of action.
“However, there’s room for concern that, while this short-term suspension of legislation represents a well-intended breathing space for many, it may create an opportunity for a few to abuse the insolvency framework further down the line.”
A “delinquent” director may, for example, seek to take advantage by using the Covid-19 crisis as an excuse for deferring payments, Mr Reid warned.
He added: “The wrongful trading provisions play a crucial role in protecting creditors from unnecessary losses. It’s important we don’t lose sight of this – even during these challenging times – otherwise other businesses may suffer.
“This temporary suspension should be a protective force for those acting in good faith, rather than a convenient cover for the unscrupulous.
“Directors should not over-interpret the suspension to act with carte blanche. They should act sensibly and cautiously, and carefully document business decisions and the reasons behind them.”
Mr Reid said an “upside” of the recent change was that it should help any firms looking to restructure to maintain access to supplies and raw materials.