What Is Wrongful Trading In Insolvency?
When insolvency becomes an unfortunate reality, company directors are undoubtedly placed into an immensely important and stressful position. Company liquidation is often the only next step, and as this process begins, everything needs to be done by the book, with priority for the interests of creditors. While it may be tempting to continue trading in an effort to bring money into the business, directors must be familiar with one key concept: wrongful trading. Engaging in it can land you in serious trouble; so, what exactly is wrongful trading in insolvency, what are the consequences, and what can you do to protect yourself?
What Is Wrongful Trading?
Under the Insolvency Act 1986, wrongful trading is defined as a company director’s choice to continue trading despite knowing, or ought to know, that there is no realistic prospect of avoiding insolvent liquidation or administration. If directors allow the company to continue trading while under threat of insolvency, they stand to worsen the company’s financial standing. If a licensed insolvency practitioner advises the company to continue trading, then as long as all legal responsibilities are carried out and all actions have been undertaken to better the company’s financial position, you’ll be free of any wrongful trading charges.
How Does It Differ From Fraudulent Trading?
It’s quite easy to confuse wrongful trading and fraudulent trading, but there is a distinct difference between the two. Wrongful trading assumes poor judgment or negligence on the part of directors. In contrast, fraudulent trading applies when directors knowingly act dishonestly with the intent to deceive creditors for their gain.
Directors’ Duties When Facing Financial Trouble
When a company begins facing potential insolvency, the responsibilities of directors shift to prioritise the needs of the company’s creditors. You need to:
- Regularly review the financial situation of the company.
- Keep detailed financial records.
- Avoid adding to any company debt.
- Secure professional advice promptly.
Consequences Of Wrongful Trading
So if you’re found out, what is wrongful trading likely to be punished with? If a liquidator determines that company directors have been wrongfully trading, they may apply to the court to hold the directors responsible. Consequences for this include;
- Personal responsibility for some or all of the company’s debt based on when wrongful trading began.
- Disqualification from holding director roles for a term of 15 years.
- Significant loss of reputation.
Is Wrongful Trading A Criminal Offence?
No, unlike fraudulent trading, wrongful trading is a civil offence and cannot lead to criminal charges or imprisonment.
What Are The Best Ways To Avoid Wrongful Trading?
Directors can take proactive steps to protect themselves from accusations of wrongful trading, including:
- Maintain consistent, comprehensive records. Document all decisions made in detail, especially those involving company finances.
- Seek out professional help promptly. Guidance from an insolvency practitioner can be vital to ensure that you’re carrying out your responsibilities without incident.
- Keep up regular communication with the board. Review the financial situation often and record any and all discussions that take place.
- Monitor the company’s cash flow very closely. You need to make sure that you have realistic, up-to-date forecasts at all times to inform your decision-making.
- Always act in the best interest of your creditors. This becomes the priority for the whole company in the face of insolvency.
To avoid potentially trading when you shouldn’t and undertaking wrongful trading in insolvency, it’s essential that you seek the advice of a licensed insolvency practitioner. At My Liquidation, our extensive experience allows us to deliver an efficient liquidation service and help you ensure that you are meeting all of your obligations during the formal insolvency process. You can get in contact with us today to find out more about the tailored liquidation services that we offer.
