Wrongful trading is a section under the Insolvency Act 1986 that involves directors knowingly making transactions to and from the business, knowing that the company is insolvent. If directors are found guilty under the Insolvency Act, they can be made personally liable for debts to creditors.

What is wrongful trading?

After a company enters liquidation, investigations are carried out into directors’ conduct along with any directors who held office before the liquidation’s commencement, and their actions will be scrutinised. Throughout the investigation, the liquidators will gather evidence of wrongful trading. If sufficient evidence is found, it will be submitted to the insolvency service who can disqualify the director from holding office again for a maximum of 15 years.

Directors found guilty may find themselves personally liable for debts accrued in the company. They may even find themselves criminally prosecuted if there is evidence of criminal wrongdoing.

What counts as wrongful trading?

Company directors should understand what is happening within their company, especially the accounts within the business. Not only will this help directors maintain control, but it also enables them to make more informed decisions and avoid any troubles with wrongful trading.

The following actions fall under wrongful trading:

• Enter into credit agreements with a supplier knowing the company will be unable to honour repayment terms.
• Deliberately amass unreasonably high debts at the creditors’ detriment.
• Pay themselves an unreasonably high salary when the company is unable to afford it.
• Continue to take deposits from members of the public if they are aware the order will be unfulfilled.
• Excessive build-up of VAT, National Insurance or PAYE debts because the money that should be put aside for them is spent elsewhere.
• The company continues taking deliveries of stock, materials and goods whilst knowing it is unable to make payments for them.

Directors can be protected from any accusations of wrongful trading, as long as they are well organised with finances, giving liquidators no reason to doubt there has been anything other than good conduct.

Avoiding wrongful trading

Once a director becomes aware their company is insolvent, it’s imperative they take steps to minimise creditor losses to protect themselves from wrongful trading accusations. If, for instance, directors ignore the indications and keep taking deposits for goods or services that the company will be unable to complete, they are putting themselves at risk of wrongful trading accusations. It is imperative directors take advice from a licensed insolvency practitioner once early warning signs of insolvency show, as they can advise the best course of action.

It is also good practice to maintain good communication with creditors and make thorough notes of any conversation or correspondence with them, including their name, department, date, and any resulting action.

What action can be taken?

Wrongful trading action is avoidable if professional advice is sought early enough, and a degree of common sense is exercised. If you are a director of an insolvent company that is still trading, consider the following:

• Do not delay taking action. If you wait until legal actions have been taken against the company, it will be much harder to defend against accusations.
• If your plan is to trade out of your company’s insolvent position, produce a cash flow forecast showing exactly how you plan on doing this. Once the cash flow forecast is complete, the directors may find insufficient resources to continue trading and seek advice from a licensed insolvency practitioner.
• When offering repayments to creditors, be sensible and make sure they are affordable. Unfulfilled promises of payment may be used against you in wrongful trading action.

How we can help

If you are concerned about wrongful trading within your company and are unsure if you are committing the offence, it’s important to act as quickly as possible. We can help guide you on what constitutes wrongful trading and talk you through the best possible responses during a liquidation.

• Informal repayment arrangements
  If the company has HMRC and VAT debts, you can apply for a Time to Pay Arrangement (TTP) to clear the arrears. These arrangements typically last between six and 12 months and require companies to submit a written proposal to HMRC. Speak to us if you wish to negotiate a TTP or if you’re worried about your current arrangement. Our licensed insolvency practitioners have years of experience and a strong working relationship with HMRC, which puts us in a healthy negotiating position.
  More on Time to Pay Arrangements
• Formal repayment arrangements
  If a repayment arrangement with more stringent, formal terms would better suit your circumstances, a Company Voluntary Arrangement (CVA) may be the better option. CVAs allow your company to repay its unsecured debts in affordable monthly instalments over five years. At the end of the arrangement, all unaffordable unsecured debts are written off.
  More on Company Voluntary Arrangements
• Restructuring
  Sometimes repaying the debt could be unfeasible, either because the amount owed is too large or the company requires further restructuring to become profitable again. During an administration, a licensed insolvency practitioner takes control of the company, restructuring it and selling off the unprofitable parts.
  More on administration
• Closing and starting again
  Sometimes, a company’s debt may be of such a level that recovery or restructuring isn’t feasible, and the company would be better off closing its doors. A Creditors Voluntary Liquidation (CVL) will see the company close in an orderly manner, writing off the unpayable debts. If the directors are clear of wrongful trading, they could potentially start a new limited company and continue the business.
  More on Creditors Voluntary Liquidation

In summary

Wrongful trading is a serious issue that can have severe repercussions on company directors. It involves directors making transactions while knowing that the company will not be able to fulfil the orders or repay its debts. For example, the company could be collecting deposits without the intention of completing the necessary work. Being found guilty can lead to directors being banned for up to 15 years, and they could incur personal liability for any company debts.

FAQs

Case Studies

Statestrong Limited

Kelly Burton • Manufacturing • Administration, Creditors Voluntary Liquidation (CVL)

Insolvency experts Wilson Field has helped turnaround the fortunes of a loss-making manufacturing company in Lancashire providing a new future for its 80 employees.

Businessman Russell Blaikie acquired the struggling 40-year-old Statestrong Limited, headquartered in Lytham St Annes, through a pre-pack sale and has been able to help the company immediately utilising his expertise in manufacturing and management.

Arrangements for the purchase of Statestrong’s business and assets were negotiated by Sheffield business specialists Wilson Field who affected the sale shortly after being appointed.

The company, which manufactures and supplies aerosol and liquid products for use in health and beauty, household, automotive and industry globally, posted sales of £12m last financial year, but had suffered pressure from creditors with outstanding arrears.
The total value of the deal is undisclosed but includes the business and the assets of the company based on Boundary Road in Lytham St Annes and Tarporley in Cheshire, which will now trade as Statestrong Products Limited.

Mr Blaikie said:

“Transactions of this nature are sensitive and require careful handling. The team at Wilson Field provided exactly the right professional approach.”

Wilson Field’s insolvency practitioners Kelly Burton and Joanne Wright worked closely with Mr Blaikie along with senior corporate case administrator Gareth Kinneavy.

Kelly Burton, said:

“The company had a wealth of expertise but was straddled with financial liabilities which ultimately made its future questionable. Looking forward, a previously distressed business now has a viable future.”

Derwent Castings Limited

Kelly Burton • Metals • Creditors Voluntary Liquidation (CVL)

Unsecured creditors owed money by a Derbyshire manufacturing company which went into liquidation are to receive a higher than the expected dividend of 60p in the pound.

A total in excess of £128,000 is due to be distributed to unsecured creditors of Whatstandwell-based Derwent Castings Limited, whose claims totalled over £192,000.

The company, whose roots date back to the 1940s, had traded profitably for a number of years but in late 2013 / early 2014 saw the cancellation of its largest sales contract which represented 70 per cent of its turnover.

Bosses at the company, which employed 16 staff including three directors, struggled to attract replacement business and had to drop prices. Further business was lost as a result of foreign competition.

Sheffield’s insolvency specialist Wilson Field was called in as liquidator and worked with the creditors’ committee of Derwent Castings Limited to secure the positive dividend.

Andy Wood, associate director and insolvency practitioner at Wilson Field said:

“Dividends for insolvent companies are generally low, or nothing, for a variety of reasons – cost of staff redundancies, difficulty collecting outstanding invoices, selling assets in a forced sale situation, selling specialist assets which have limited appeal to purchasers, deteriorating or perishable assets, as well as other costs involved.

“However, thanks to a very positive relationship with the creditors committee, I am delighted to return a healthy dividend to the unsecured creditors in the region of 60p in the pound.

“The supply chain is often greatly affected by a liquidation and in this case we have been able to help creditors.”

Derwent Castings Limited was incorporated in August 2002 and specialised in iron casting from the five-acre Derwent Foundry site at Whatstandwell near Matlock.

However, the iron founding operation at Derwent Foundry was first introduced back in 1946 by Wragg & Hawksley which produced cast iron pipes for the water industry.

In 1950 the foundry was acquired by WH Davis & Sons Ltd to supply castings for their railway wagon building business. Following a management buy out in 1984, the company was renamed Derwent Foundry Ltd and following its closure in July 2002, was bought by its present owners and renamed Derwent Castings Ltd.

Amongst jobs carried out on site were moulding using loose pattern and modern air setting (boxless) sand systems; metals work using the latest in electric induction melting producing a wide range of grey, SG and alloy irons; an independent Namas approved test laboratory, finishing, pattern making and machining facilities.

M J Squire Limited

Kelly Burton • Construction & Engineering • Creditors Voluntary Liquidation (CVL)

A bespoke joiners and shop fitters in Sheffield, M J Squire Limited, had been in its trade for more than 30 years.

However, recently it has been forced to close due to the downturn in the construction and retail industry.

The company was located at Orgeave Close in Sheffield, after working for many household names over the years including House of Fraser, Levi’s, Austin Reed and Tommy Hilfiger.

Until 2014, it had been a profitable company but over the past couple of years, it had been unable to secure profitable contracts.

February 10^th, 2016 saw the appointment of Wilson Field’s Andy Wood and Robert Dymond as liquidators. This development for the company came as a result of suffering cash flow problems.

Operations at M J Squire Limited have now ceased and regrettably, all nine roles within the company were made redundant.

Andy Wood, insolvency practitioner from Wilson Field, spoke about his work on this case. 

“Declining sales at M J Squires significantly impacted cash flow and the business’ ability to meet its liabilities. In the face of tough market conditions, the director has taken the difficult decision not to continue trading. The business has closed and the assets are being sold.”

“It is very sad to see this well-known local business cease to trade after over 30 years. The downturn in the retail sector has hit this business hard.”

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