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Failing to keep on top of your company’s finances can result in wrongful trading accusations, which can lead to personal liability for the company's debts.

Take action as soon as possible to:

  • Alleviate creditor pressure.
  • Reduces the risk of personal liability.
  • Move on after closing the company via liquidation.

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    Wrongful trading

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    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.

    As part of their measures to combat coronavirus, the government currently has wrongful trading laws suspended until 30th June 2021.

    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.

    Personal liability for company debts

    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.

    Wrongful trading

    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

    What is the difference between insolvent trading and wrongful trading?

    While there is some crossover between trading whilst insolvent and wrongful trading, the latter occurs when directors know their company has traded whilst insolvent and continue trading through the company without taking the necessary steps to tackle the insolvency. If liquidators find that wrongful trading has occurred, they can hold the directors personally liable for the company’s debts. Accusations of wrongful trading can sometimes lead to allegations of fraudulent trading.

    Wrongful trading, insolvent trading and fraudulent trading
    Trading whilst insolvent

    What is the difference between wrongful and fraudulent trading?

    Wrongful trading is a civil offence that could lead to the director of the company in question being held liable for the company’s debts. Fraudulent trading involves deliberately deceiving or defrauding clients and creditors. It is a criminal offence and can lead to criminal charges.

    The differences between wrongful trading and fraudulent trading

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