Insolvent Trading Of A Company / Wrongful Trading

For example, a director may plead he was unaware the company was insolvent because he had no financial information. In that situation, the court might accept the director did not actually know the company was insolvent. But that is irrelevant and he will still be liable for wrongful trading: by failing to prepare accounts he failed to act as a reasonable director would.

Company Directors Responsibility 

 Under Section 214, a director of a company in liquidation may be ordered by the court to contribute personally to the assets (funds) in the liquidation.

The court will make such an order if the director knew or ought to have realised that the company was going to go into liquidation and yet he decided to carry on trading. This is called wrongful trading.

 If a liquidator pursues a wrongful trading action, a settlement short of a court hearing may well be obtained, so there are few reported court cases dealing with wrongful trading even though results are obtained in many cases.

But there are problems associated with using the remedy. It is difficult to show what someone actually knew. What evidence can be produced to show someone’s state of mind? Frequently directors can say they honestly believed the company would trade its way out of difficulty, and how can that be disproved?

Furthermore, as with any court actions there may be problems obtaining funding to pursue them and knowing whether the director is worth suing in the first place. Remember this isn’t an action to claim back an asset or cash which the director took from the company, it’s more akin to a ‘penalty’ which the director must pay because he made the wrong decisions in relation to the company’s trade. So the director may not have personally gained from the wrongful trading such that he will have the funds with which to reimburse the company.

Nevertheless, it is well worth the Department seeking this remedy in the right cases. On the evidential point, it’s not just what the director actually knew, but what he should have known had he been a reasonable director. So, the court can consider what a reasonable company director in that situation should have done.

If you need any further advice to see if your company is trading insolvently or not, please give us a call for a free confidential chat on our insolvency helpline on 0800 24 0800.

 

Moe Nawaz – Author – Speaker – Insolvency Auditor - Business Coach