Wrongful Trading or Trading Whilst Insolvent

Don’t get caught with your pants down – wrongful trading and director liability

If found guilty of wrongful trading; the penalties can be severe. Directors can be disqualified from being a director and held personally liable for the company’s debts.

The ongoing downturn means there has never been a more worrisome time to be a director.

Directors (and shadow directors) may be liable to contribute to the assets of the company if it is allowed to carry on trading at a time where the director knew or ought to have known there was no reasonable prospect of the company avoiding insolvent liquidation.

Wrongful trading actions are brought by the liquidator and it will be for the liquidator to determine the point at which the director ought to have known the company was insolvent but carried on trading; where a reasonable person of his skill and knowledge would not have done so.

It will be for the court to decide what the level of contribution from the director should be and when deciding when the director ought to have known the court will look at:

  • What is detailed on the statutory accounts (balance sheet test – If liabilities of the company exceed the assets)
  • When it became clear that the company could no longer meet its liabilities as they fell due i.e bounced cheques, court proceedings issued/judgements awarded, refused supply.

There is however a defence for wrongful trading; that the director took every step possible to minimise the loss to creditors. This can include:

  • Negotiating new payment terms with creditors
  • Consulting with company bank
  • Ensuring all financial information to available and up to date
  • Reducing overheads
  • Taking professional advice
  • If trading continues, directors should carefully record any ongoing issues and decisions.

If found guilty of wrongful trading; the penalties can be severe. Directors can be disqualified from being a director and held personally liable for the company’s debts.

Author: Emma Bower

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