Wrongful Trading

Wrongful trading occurs where directors allow a company to continue trading when it is insolvent and they knew or ought to have known the business is insolvent. Wrongful trading is also often described as insolvent trading.

The definition of wrongful trading under the Insolvency Act makes clear that factors such as the skill and experience of a specific director will be part of any assessment as to whether trading when insolvent has occurred. The risk for company directors is that, on insolvency, an appointed liquidator is duty bound to consider the conduct of directors in the lead up to insolvency.

Where the directors have traded on when the company was already insolvent, action against directors or some of them, for wrongful trading is possible. The result of this can mean directors being personally liable to cover some of the company's debts.

 It's essential to get good advice, whether from accountants, lawyers or both.

Defending allegations of wrongful trading

If you are facing  charges of wrongful trading your best first option is to take legal advice. To successfully defend allegations you will need to show that you have acted in good faith. Some of the factors will which will likely be relevant will include :

• If the company's financial position deteriorated rapidly

• Whether you can demonstrate that you were carefully monitoring the company's financial situation in the lead up to insolvency

• Whether, when it was possible or likely that the company might be insolvent, you sought advice form accountants and lawyers. If you did, you should obtain some protection (because you sought professional advice) against allegations that you continued to trade while insolvent.

• Whether you kept in contact with your creditors, told them what was going on and did not prefer one creditor over others.

• Whether there is any evidence that you continued trading in order to not make your personal position worse. It can be tempting to continue trading when you have given a personal guarantee for some of the company's debts or have an outstanding director loan from the company to you.

Our experienced and specialist lawyers would be happy to talk you if you are concerned about wrongful trading. Please do get in contact.