Shadow business secretary Ed Miliband has urged the government to extend the suspension of “wrongful trading” rules to the end of the year or risk a flurry of firms going bankrupt.
Back in March, ministers introduced a temporary protection for business directors to protect them from liability if they kept trading despite facing bankruptcy due to the coronavirus pandemic.
Under normal trading conditions, directors can be prosecuted if they continue to trade in the knowledge that there business will go insolvent.
At the time, the government said the step was taken to “remove the pressure on directors to close otherwise viable businesses to avoid potential liability”.
While protections against insolvency for businesses have been renewed until 31 December, the rule protecting business owners has now lapsed.
As a result, company directors could now face financial or legal action if their business is struggling to stay afloat but they do not cease trading.
Miliband said: “Ministers cannot explain why they have pulled the plug on this protection.
“If it was right to help businesses stave off insolvency in June it is right now. The government seem to have moved from ‘we’re all in this together’ to ‘sink or swim’.
“Ministers claim to want to protect struggling businesses, but the decision to remove this key protection for business owners flies in the face of that claim. They must urgently change course or the risk is that we see insolvencies snowball before Christmas.”
In September, there were 926 company insolvencies, a rise of around 150 on the month before, according to figures from the Insolvency Service.
Labour added that failing to protect business owners from liability could backfire on the government, as it could see firms default on emergency loans at the taxpayer’s expense.
City A.M. has contacted the Department of Business, Energy and Industrial Strategy for comment.