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Wrongful trading

Wrongful trading is a section under the Insolvency Act 1986 that can make company directors personally responsible for liabilities where there is sufficient evidence that they intentionally traded the company at the detriment to creditors. Investigations into directors conduct will be carried out if a company enters liquidation and any director who held office prior to the commencement of liquidation will be scrutinised. Any evidence of wrongful trading will be gathered through the investigations carried out by the liquidator and, if sufficient evidence is found, it will be submitted to the insolvency service. The insolvency service may then disqualify the director from holding office again for a maximum of 15 years. Directors found guilty of wrongful trading may also find themselves personally liable for debts run up in the company and may even find themselves being criminally prosecuted if there is evidence of criminal wrong-doing.

Wrongful trading accusations may arise if company directors:

  • Enter into credit agreements with a supplier knowing the company will be unable to honour repayment terms.
  • Deliberately amass unreasonably high debts at the detriment to creditors.
  • 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.
  • Build up excessive VAT, NIC or PAYE debts because money that should be put aside for them is being spent elsewhere.
  • Continue to take delivery of stock materials and goods whilst knowing the company is unable to make payments for them.

If a directors feels that any of the above may be applicable to their company, then it is vital that they seek advice from a licensed insolvency practitioner as a matter of urgency in order to find out what needs to be done to make themselves compliant and minimise any potential damage caused.

Can I protect myself from wrongful trading?

Once a director becomes aware that their company is insolvent it is imperative that they take steps to minimise creditor losses in order to protect themselves from wrongful trading accusations. If for instance, directors ignore the indications and carry on taking deposits for goods or services that the company will be unable to complete, they are putting themselves at risk of wrongful trading action. It is imperative for directors to take advice from a licensed insolvency practitioner during the early warning signs of insolvency, as they will be able to advise on 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 had with them, including name, department, date and what action may have resulted.

What constitutes operating a PAYE, NIC or VAT scheme badly?

In essence, this means failing to pay deductions for PAYE and NIC to HMRC as and when they are due. HMRC takes a hard line on Directors who fail to comply with this legal obligation.

HMRC is a union of two old government agencies, namely Inland Revenue and HM Customs & Excise. Information about your company taxation is now held centrally in one place. HMRC is now able to spot a companies’ inability to adhere to their legal obligations in regards to tax and VAT much earlier than when they were split into two bodies.

If your company is falling behind or on PAYE, NIC and VAT payments, HMRC will be concerned and will certainly be taking steps towards clarifying your company’s financial position. If your company is struggling with HMRC payments, immediate action should be taken to obtain clarification on whether or not the company is insolvent.  If you do not, HMRC may take matters into their own hands and issue a winding-up petition.

Wrongful trading may result in personal responsibility for directors

Directors of a limited company that has entered into a voluntary or compulsory liquidation may, in some instances, be personally liable for some of the company liabilities.  The may be the case if Directors have continued trading without taking reasonable efforts to deal with the financial problems by mitigating losses to creditors, or if directors have signed a personal guarantee which stipulates they will meet the obligations of the company if the company is unable to. The best way to protect against being held personally responsible is by taking pro-active steps to minimise creditor losses. If a personal guarantee has been signed we strongly suggest you seek immediate legal advice. We can recommend solicitors who deal with this type of work.

Completing works in progress

If a director is intending to place their company into a creditors voluntary liquidation, it may be possible for them to fulfill on-going work if they feel a sense of obligation towards customers. Continuing to trade in this scenario will only be acceptable if it can be proved by doing so will be of benefit to creditors and increase the amount that is available for repayment to them.

If the above scenario is illustrative of the situation your company finds itself in, you must seek advice and act under the guidance of an insolvency practitioner. It is crucial that the company does not incur any further debts whilst completing the work.

If by fulfilling on-going work you increase the amount owed to creditors or it serves no financial sense to do so, we would advise against such action. To go against the advice of an insolvency practitioner would mean your chances of wrongful trading action are increased dramatically.

PLEASE BE CAREFUL: It is imperative that you seek professional advice before you make any decisions regarding continuing to trade. If your company is forced into liquidation later on down the road, the liquidator may not agree with your decision and any losses experienced by the creditors could be made your personal responsibility.

Important Considerations

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 and are still trading, please 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 showing exactly how you plan on doing this. Once the cash flow forecast is complete the directors may find there are insufficient resources for the continuation of trade and should seek advice from a licensed insolvency practitioner.
  • When deciding on comfortable repayments to offer creditors be sensible and make sure they are affordable. Unfulfilled promises of payment may be used against you in a wrongful trading action.
  • If the company has HMRC and VAT debts, you may be granted “time to pay” in order to clear the arrears. When drafting a time to pay proposal, ensure you include a detailed cash-flow and be sensible about repayment amounts. Contact Wilson Field or HMRC directly in order to assess if a time to pay arrangement is viable.
  • If the company has any worrying legal actions, we will be able to advise you on the best course of action.
  • Finally, and most importantly, if a sensible cash-flow forecast has been completed and the results indicate the company being insolvent, do not ignore this and seek professional help right away. Other options will need to be considered at this point such as administration, liquidation (including pre-pack liquidation), or a company voluntary arrangement.

We offer a fast and efficient service with nationwide coverage from a network of regional offices, meaning a free consultation can be arranged at a time and location most convenient to you.

If you think you are trading wrongfully, then the need to seek advice as a matter of urgency cannot be overstated. Get in touch today to arrange a free confidential consultation with no obligation.

Authored by Phil Meekin

Phil Meekin

Head of Marketing

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