Wrongful Trading

Worried About Wrongful Trading? What Are The Options?

Wrongful trading is a principle of UK insolvency law and implies certain standards of directors. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company.

Being a Director of a limited company in today’s economic climate can be a tricky business. Trading conditions now are as hard as they have ever been, and restrictions on availability of credit combined with lengthening delays in payment are putting cash positions under strain. As a result many companies will run into financial difficulty. Wrongful trading is a real worry for directors and so early intervention by a director will be expected.

Directors are obliged to take decisions as to whether the business can continue in such circumstances or should cease to trade. Failure to do so may result in the directors having to contribute personally to the company’s losses in the event that a failure leads to additional losses.

Under Insolvency legislation a director may be liable for wrongful trading if a company trades whilst insolvent. Specifically, if the director knew or should have known that the company could not avoid becoming insolvent but still continues to trade, then he or she must cease to trade immediately and take steps to liquidate the company. A failure to do so, which results in further losses being incurred which may have been avoided, may result in the director being guilty of wrongful trading and liable to personally pay those losses to creditors.

Therefore a director of a company which is in financial difficulty must ensure that there is a reasonable prospect that the company will avoid insolvent liquidation before being party to any decision to trade on. Even if nothing happens as a result of taking advice, a director will have discharged his duty.

The warning signs are there if you know where to look. Directors of companies experiencing financial difficulty often take too long to read the warning signs and approach a professional for advice. If a professional is contacted early in many cases a business can be saved. The following steps must be taken:

• 1. Directors should always meet regularly to discuss their business and any potential problems
• 2. The most accurate and up to date financial information must be available
• 3. Note taking of all these meetings is important so that they can be referred to and relied upon at a later date.
• 4. Any decisions made should be regularly reviewed.
• 5. If at any stage there is a concern as to continued viability, or the circumstances change, then seek advice.

It may not mean that the company must cease trading but it may again help if called upon in due course to evidence the steps taken to protect creditors. Directors can escape liability for wrongful trading if they can prove they took adequate advice and precautions to keep losses to creditors to a minimum after it became apparent that the company was insolvent.

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