To the widespread displeasure of businesses Rachel Reeves’ Autumn budget announced an increase in employers’ national insurance contributions (“NICs”) from 13.8% to 15% and a reduction to the threshold above which NICs must be paid (from £9,100 to £5,000). These changes mean that from 6th April 2025 not only will employers have to pay NICs at a higher rate, but will also start to pay NICs on employees earnings above £5,000, whereas they currently pay NICs on earnings above £9,100. According to the government, 940,000 employers, the bulk of which will be companies, will see their liability to pay NICs increase and the changes will result in annual increase in NIC receipts in excess of £23 billion. According to the Institute for Fiscal Studies employers will have to pay an additional £900 for each employee on median average earnings of £33,000.

Clearly the impact on businesses will be significant. Many will struggle to cope and many will be unable to. Directors need to be prepared to deal with the impact of these changes on the companies they run and those who are unprepared may find themselves in hot water.

The instinct of most directors will be to do all they can to save a distressed company, but following that instinct may result in them incurring personal liability. Trading on in the hope of an upturn in the company’s fortunes and its eventual salvation can have disastrous personal consequences for directors.

The well-publicised case of Wright and others v Chappell, Henningson and Chandler [2024] EWHC 1417 (Ch) concerning the collapse of BHS, resulted in its directors Dominic Chappell and Lennart Henningson being ordered to pay over £110 million as a result of causing BHS to continue to trade after the point at which its insolvency was inevitable.

Claims against the directors were advanced inter alia on the basis of wrongful trading and misfeasance trading. On the wrongful trading claim the court found that the directors ought to have known in September 2015 that BHS could not be rescued and that they were therefore personally liable for the worsening of its financial position thereafter.

“Trading misfeasance” as it was described in the judgment, is based on breach of duties owed by directors to the company and its creditors. These duties arise under sections 171 to 176 of the Companies Act 2006 and at common law. The common law duty owed to creditors was affirmed by the Supreme Court in the case of BTI 2014 LLC v Sequana SA [2022] UKSC 24 and arises where directors know, or ought to know that a company is insolvent, on the cusp of insolvency or that insolvency is probable. Where liquidation is inevitable the interests of creditors override the interests of shareholders. Up to the point that liquidation becomes inevitable directors have a duty to consider both the interests of shareholders and creditors, with the interests of the latter carrying more weight as the company’s financial position worsens. Failure to consider the interests of creditors and take appropriate action, including but not limited to placing the company into some kind of formal insolvency process, may result in directors becoming personally liable for losses caused to creditors. Usually the measure of that liability will be the increase in the net deficiency resulting from continuation of trade generally, but may also be calculated by reference to specific transactions entered into by the company.

To avoid personal liability in the event that the company enters insolvent liquidation, directors need to tread very carefully from the point at which there is a risk of insolvency. Whilst the Supreme Court declined to hold that the creditor duty arises when there is only a risk of insolvency, identifying the point at which a risk of insolvency becomes probable may be difficult and is open to interpretation.

With HMRC due to collect an extra £23 billion annually from employers from April 2025, there are likely to be significant financial pressures on companies. The directors of companies which are likely to struggle with those pressures need to plan ahead on how to cope with them. As can be seen from decisions referred to above, failure to take proper action now could result in directors becoming personally liable down the line.