On 15 May 2020, the Law Society of Jersey issued a new practice statement to guide company directors on wrongful trading and the COVID-19 pandemic.
By way of background, wrongful trading under Jersey can be established when a director:
(a) knew that there was no reasonable prospect that the company would avoid a declaration of en désastre (Jersey’s insolvency) or a creditors’ winding up; or
(b) on the facts known to him or her was reckless as to whether the company would avoid a declaration of en désastre or a creditors' winding-up.
However, the following points were emphasized by the Law Society of Jersey:
1. A claim can only be made for wrongful trading if the company is the subject of a formal bankruptcy process.
2. The liquidator or the Viscount will need to establish conditions (a) and (b) above are satisfied, which may be a significant evidential burden to overcome
3. Condition (a) above means that the director must know that the company no longer has a reasonable prospect of survival.
4. The costs in bringing an action against a director may need to be considered by the Viscount or the liquidator.
5. In practice, a claim against a director is only likely to be pursued if the director has the personal resources to fund any order made against the director or the director has D&O insurance or other indemnification arrangements.
6. Even if the Viscount or the liquidator can establish that condition (a) or (b) above is satisfied, the director may still have a statutory defence to a claim since the Jersey courts cannot make an order against the director if the director took reasonable steps intending to minimise the potential loss to the company’s creditors.
7. As opposed to English law which requires a director to have taken "every step" to minimise the potential loss, Jersey wrongful trading defence only requires a director to take "reasonable" steps.
8. There has not been any successful wrongful trading claim being made before the courts of Jersey to the Law Society of Jersey’s knowledge.
The practice statement also clarified point 6 above and noted that the statutory defence does not require losses to have been minimised. What matters under the statutory defence is not the result but whether or not reasonable steps were taken to minimise losses. As such, directors may be able to demonstrate that reasonable steps have been taken by taking independent professional advice from lawyers and accountants, holding frequent board meetings to monitor the financial position of the company or modelling on varying assumptions the cash flow forecasts of the company to identify fundamental stress points.
To read the practice statement in full, please click here.