Wrongful Trading is where directors have continued to trade their company’s business beyond an obvious point where there was no reasonable prospect of it avoiding an insolvent liquidation. There are implications if directors do this, knowingly or otherwise.
Once a company has entered insolvent liquidation the Court has the power, on the application of the liquidator, to enforce one, some or all the directors to contribute to the company’s assets for the additional losses incurred.
However, to do this the Court must first judge whether the directors should have concluded that insolvent liquidation could not be avoided, and/or that they knowingly refrained from taking appropriate steps to minimise the potential loss to creditors.
In making this judgement, the Court must consider whether the conclusions reached, or steps taken, by the director(s) were in line with those that would have been reached/taken by a reasonably diligent person with the same level of experience, skill and general knowledge carrying out the same functions as that director. The knowledge, skill and experience of the director(s) in question would also be taken into account.
If the Court is satisfied that the directors took every possible step to minimise the potential loss to the company’s creditors, it will rule against ‘wrongful trading’.
However, directors are at risk of being accused of wrongful trading when they cannot provide evidence that they acted in good faith when making decisions that then turned out to be wrong.
If found guilty, directors can be disqualified from holding the position of director for a defined period of time and may be liable to make a payment to the company at a level that the Court thinks fit.
As a director you do have a duty to protect yourself against wrongful trading. We therefore recommend that up-to-date financial information is kept and reviewed regularly. If insolvent liquidation of a company cannot be avoided then directors must look to minimise the potential loss to creditors.
Action required will depend very much upon the company in question’s individual circumstances. If you are uncertain about the situation that your company is in and are worried about the potential of ‘wrongful trading’ please get in touch with us as soon as possible.
Looking for other helpful liquidation information? Try our resources section, which is full of useful articles.