When your company might be at risk of insolvency, you and your fellow directors need to tread very carefully. Get things wrong and you could be facing a claim for wrongful trading. You could be held personally liable for some of your company’s debts.
But what is wrongful trading? Who can bring a claim? And what can you do to make sure you stay on the right side of the law?
What is Wrongful Trading?
In a nutshell, wrongful trading is irresponsible trading. It’s when a company’s directors continue to trade when they shouldn’t have done so, thereby causing loss to the company’s creditors.
It’s continuing to trade past the point when you knew or ought to have known that your company was insolvent.
Continuing to make transactions when your company lacked the finances or cash flow to pay its debts. Past the point when you knew or should have known there was no reasonable prospect of avoiding liquidation or administration.
Who can bring a claim for Wrongful Trading?
Once your company has gone into administration or liquidation (whether voluntary or compulsory), the administrator/liquidator could bring a claim for wrongful trading under section 214 of the Insolvency Act 1986.
This involves them seeking an order from the court for you to make a personal contribution towards the debts your company owes.
Unlike Fraudulent trading, Wrongful Trading is not a criminal offence. It’s a civil wrong. But the potential consequences are still serious.
That’s why it’s vital to take expert legal advice from specialist solicitors as early as possible.
What are the potential consequences of Wrongful Trading?
If the claim is proven against you, you can be held personally liable for the losses suffered by the creditors. You can be ordered to contribute to the company’s assets to the value of those losses.
This would be from the point you knew or ought to have known the business was insolvent. But otherwise, there is no limit on the compensation the court can order you to pay.
You could also be fined and face being disqualified as a director.
Is there a defence to Wrongful Trading?
Yes. We can help you defeat a claim if it can be shown you took every step you ought to have taken to minimise the potential loss to the company’s creditors.
That’s why, when your company is at risk of insolvency, it’s crucial you properly document all the decisions you and your fellow directors make and all the steps that you take.
How to avoid Wrongful Trading
If your company is experiencing cash flow problems or other financial difficulties, it’s a stressful time. Your natural inclination may well be to try to keep your business going. To trade your way out of the difficulties.
After all, aren’t you under a duty to act in the best interests of the company and its shareholders?
Ordinarily, that’s right. But when your company is on the verge of insolvency, your obligation changes. Now, you must put the interests of your company’s creditors first. Your duty is to take steps to minimise their potential losses.
That’s why if you have concerns about the solvency of your company, it’s essential you take advice at the earliest opportunity.
How we can help
Altion Law’s experienced solicitors have advised many directors of companies at risk of insolvency. And we’ve robustly defended many more accused of wrongful trading.
- We provide clear, jargon-free explanations of directors’ duties and potential liabilities.
- We’ll review your existing policies and procedures.
- And we’ll advise you on best practice for properly documenting your decisions to avoid future problems.
Start putting the right strategy in place
Let us help you. We’re based in Milton Keynes but we can act for you wherever you are in England or Wales.
Don’t hesitate. Contact us today to discuss your situation. And the next steps for putting the right legal and commercial strategy in place.