Being the director of a company comes with huge responsibility. Equally, if the company is successful and profitable, it can offer huge rewards too.

Creditors of the company, whether they are the employees, suppliers or HMRC, should be paid as per their payment terms and contracts, whether the company is performing well or not. They should be able to trust that the company directors are doing everything they can to make the company a success and pay creditors on time.

Directors will likely be responsible for many of the functional areas of the business – sales, marketing, HR, finance and operations. They may be focused on some areas more than others but if they have the right financial reporting in place, they should have an understanding of the overall company performance and therefore when it is heading for trouble.

Three things company directors need to understand about wrongful trading

Once a company becomes insolvent, or is unlikely to avoid falling into insolvency, and the company’s directors are aware, it is unlawful for them to continue trading. They should seek the advice of a licenced insolvency practitioner as soon as possible.

If a company director is aware the company is insolvent and continues to trade this is known as Wrongful Trading, and it comes with consequences. We outline three things company directors need to understand about wrongful trading.

1. As soon as a company director becomes aware the company is insolvent, they’re at potential risk of wrongful trading and personal liability.

Let’s be clear on exactly how wrongful trading is defined. According to section 214 of the Insolvency Act, 1986, wrongful trading occurs when:

i. Directors know the business is insolvent, and

ii. They continue trading with knowledge of insolvency and do so without any realistic prospect of paying creditors
going forward.

For some directors it may be tempting to continue trading, not necessarily for malicious reasons. The directors might simply still be hopeful that a resurgence of trade is round the corner, or they don’t want to admit that the company has failed.

Either way, continuing to trade with the knowledge that the company is insolvent is a civil offence and the company directors are potentially at risk of personal liability.

2. Instructing an insolvency practitioner can reduce the risk of wrongful trading.

As soon as the company directors understand that the company is insolvent, they are potentially at risk of wrongful trading. What steps can they take to minimise the risk of wrongful trading? The best action to take is to seek professional advice as soon as possible, preferably from an insolvency practitioner. They are best placed to advise the company directors on their options and how to act in the interests of the company’s creditors from this point forward.

The appointed insolvency practitioner has the responsibility to establish when the insolvency occurred and whether wrongful trading has taken place. It’s important that detailed financial forecasts are maintained and regular board meetings held which will act as supporting evidence that wrongful trading has not taken place. The focus will be to realise assets and repay creditors without preferential treatment being given to any of them.

3. The consequences of wrongful trading are serious.

Although wrongful trading isn’t a criminal offence, it is a civil offence. The company’s directors can be held personally liable for the company debts. They can also be banned from acting as the director of a limited company for a period of up to 15 years.

These serious consequences are the reason why the director of any insolvent company should seek the professional advice of a licenced insolvency practitioner as soon as possible.

Are you concerned about wrongful trading? Talk to us today.

If you have concerns about the financial stability of your company and you believe it is likely the company could turn insolvent in the near future, we recommend picking up the phone and speaking with our team today for two reasons:

Firstly, the company may be financially stressed but there could be some options available to save the viable parts of the company. An insolvency practitioner can review and make recommendations on the best route forward.

Secondly, by engaging in conversation with an insolvency practitioner as early as possible demonstrates your desire to prioritise the needs of the creditors and take measures to mitigate the possibility of wrongful trading.

We’re here to talk – call us on 0808 196 8676 or email help@trusolv.co.uk