Don’t Fall into the Trap – Wrongful Trading and Director Liability

The current economic climate means these are worrisome times to be a director. Keeping a business running successfully is harder than ever and some directors can find themselves in trouble, trying to trade their way out. A valid way of turning your business around, however, if things are too far gone, you could see yourself wrongfully trading.

If directors allow a company to continue trading, knowing or having ought to have known that the company was insolvent with no reasonable prospect of recovery, then director liability can be severe. In some cases they can be held personally liable for the company’s debts.

Wrongful trading accusations are brought to the liquidator’s attention, and it will be for that liquidator to determine the point at which the director ought to have known the company was insolvent but chose to continue trading.

What the court will look at

It will be for the court to decide how much the directors should contribute. While determining when the director ought to have known, the court will look at:

• The details on the statutory accounts (balance sheet test – if the company’s liabilities exceed the assets)

• When it became clear that the company could no longer meet its liabilities as they fall due, i.e. bounced cheques, court proceedings issued, judgements awarded or if they were refused supply.
• The taking of deposits, whilst knowingly unable to complete orders.
• Taking supply’s whilst also knowingly unable to pay your orders.
• Directors loan accounts

If the director acted reasonably

There is, however, a defence for wrongful trading: If the director took every step to minimise the loss to creditors. These can include:

• Negotiating new payment terms with creditors.
• Consulting with the company’s bank.
• Ensuring all financial information is available and up to date.
• Reducing overheads.
• Taking professional advice.
• Carefully recording of any ongoing issues and decisions if trading continued.

If the director is found guilty

During the process of any limited company being liquidated, the conduct of the director will be investigated. This specifically relates to how their trading will have impacted the company, and if a director has been looking out in the best interest of company creditors.

If you as a director are found guilty of wrongful trading, the penalties can be severe. You can lose your company’s limited liability protection, and risk being disqualified as a director for up to 15 years, or if there is evidence of criminal wrong-doing; you can even find yourself being prosecuted.

Directors and limited liability

Under normal circumstances, limited companies offer limited liability protection; meaning your company debts are kept separate from your personal finances, so if your company encounters financial trouble, you shouldn’t be affected personally. The only times this would be waivered is if you have personal guarantees in place on your assets, or if you’re found guilty of wrongful trading. If this happens, you will be personally liable for the company’s debts run-up in the insolvent period, and you’ll have to pay for them out of your own pocket.

In summary

If you as a director willingly allow a company to continue trading while it’s in an insolvent state, while making no effort to minimise your losses to creditors, you could be guilty of wrongful trading. If the court finds you guilty, then you could face director liability penalties could be heavy. You could disqualify you from being a director, hold you liable for the company’s debts occurred while it was insolvent, and even prosecute you.