Wrongful Trading describes a situation where directors continue to trade their companys business beyond the point where they knew, or ought to have concluded, that there was no reasonable prospect of avoiding an insolvent liquidation. If this is found to be the case, what are the implications for the directors?
When the company eventually goes into insolvent liquidation the Court has power, on the application of the liquidator, 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 concluded that insolvent liquidation could not be avoided, and/or that they did not take appropriate steps to minimise the potential loss to creditors.
In making this judgement, 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 as well as the general knowledge, skill and experience the director actually has.
If the Court is satisfied that the directors took every possible step to minimise the potential loss to the company’s creditors, then it will not make a declaration.
However, 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.
If any of your clients are getting into financial difficulty, it is important that they have up-to-date financial information so that they are able to keep their company’s financial position under review. If insolvent liquidation cannot be avoided then directors must act with a view to minimising the potential loss to creditors. What action they will need to take will depend very much upon the company’s individual circumstances. If they are uncertain, directors should seek our advice as soon as possible.
Company liquidations increase
Figures provided by The Insolvency Service for the first quarter of 2012 show that the number of company liquidations stood at 4,303 an increase of 4.3% in comparison to the same period last year. Conversely, individual insolvencies for the first quarter of 2012 stood at 28,723, which was down 4.7% when compared to the same period.
For business, the figures are not positive and certainly mirror sentiment that the trading climate will continue to be tough through 2012. This will invariably affect the individual too, although the reduction detailed above might indicate some stabilisation.