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Wrongful trading and the implications for directors

What is wrongful trading?

Wrongful Trading describes a situation where directors continue to trade beyond the point where they knew, or ought to have known, that insolvent liquidation could not be avoided.

What are the implications for the directors?

When the company eventually goes into insolvent liquidation, the Court has the power to enforce one, some or all the directors to contribute to the company’s assets for the additional losses incurred. But first, the Court must judge whether the directors should have known that insolvent liquidation could not be avoided, and/or that they did not take appropriate steps to minimise the potential loss to creditors.

The Court must consider whether the conclusions reached, or steps taken, by the director were the same as those that would have been reached or taken by a reasonably diligent person having the general knowledge, skill and experience expected of a person carrying out the same functions as that director.

If the Court is satisfied that the directors took every possible step to minimise the potential loss to creditors, then it will not make a declaration. Directors are at risk of being accused of Wrongful Trading when they cannot provide evidence that they acted in good faith when making decisions that then turned out to be wrong.

If found guilty of wrongful trading, directors can face disqualification and may be liable to make a payment to the company at a level that the Court thinks fit.

What to do if you are a director and worried about your company’s financials

If you think your company is facing financial difficulties, it is important that you have up-to-date financial information so that you can keep the company’s financial position under review. If insolvent liquidation cannot be avoided then you must act with a view to minimising the potential loss to creditors. What action you will need to take will depend upon your company’s circumstances. If you are uncertain, it is best to seek advice from a licensed insolvency practitioner as soon as possible.