Wrongful Trading: An Update

The practice statement issued this week seeks to clarify the circumstances in which a wrongful trading claim may be brought against directors under Jersey law and emphasises certain matters by way of reassurance to directors, such as:

• a wrongful trading claim can only be brought against a director if the company enters a formal insolvency process; and
• for a claim to be successful, a director must know (or be reckless on the facts known to him or her) that the company no longer has a reasonable prospect of survival and there may be a wide spectrum of legitimate views as to what constitutes a “reasonable prospect”.  It may be that the Viscount or liquidator may only wish to pursue a clear claim, as there will be a significant evidential burden for them to overcome.

Directors are reminded that an order cannot be made against a director if they took reasonable steps to minimise losses to creditors and guidance is offered in the statement as to how directors may be able to demonstrate having taken such reasonable steps. Prudent financial and cash flow management are key during this time.  The practice note emphasises that it is not necessary to prove that losses to creditors were in fact minimised, rather that reasonable steps to this end were taken.

The practice statement offers practical guidance as to possible steps that could be taken that may go some way to defeat a wrongful trading claim should this be advanced at a later stage. What will be deemed to be reasonable in the circumstances will be very fact specific and the statement acknowledges that with the truly unprecedented circumstances that COVID-19 presents, there may simply be too many different views and approaches to say with any certainty that the directors did not take reasonable steps. This will offer some comfort to concerned directors at this time.