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Wrongful Trading
Wrongful trading is a cause of action which can be brought by a liquidator or administrator when a company is placed into voluntary or compulsory liquidation or administration. Before deciding whether to bring a wrongful trading claim the relevant officeholder will give consideration to the conduct of the directors of the company and consider whether the directors knew, or ought to have known, that insolvent liquidation or administration was inevitable and if the directors took every step to minimise potential losses to the company’s creditors.
If the directors did not take very step during that period, the court can be asked to find that wrongful trading has taken place and require those directors to contribute, personally, to the company for the worsening of the company’s financial position occasioned by the wrongful trading. Wrongful trading is also a consideration in director disqualification proceedings.
The court is unlikely to make such an order if the directors can show that they took every reasonable step they could with a view to minimising loss to creditors. It is critical that if insolvency becomes an issue, or is likely to become an issue, that directors have regard to their obligations to the company and its creditors and seek to address the issues of (a) whether the company can continue to trade and (b), if it is to do so, minimising losses to creditors.
There is no specific guidance upon which directors can rely in demonstrating that they took “every step” and this may be different for each business. However, there are some fundamental basics which directors need to be aware of if there is any prospect of formal insolvency. By taking those steps directors will be better placed to deal with any suggestion of wrongful trading.
Early advice is key and we can assist in providing guidance on what directors should be doing to identity the threat of insolvency and what steps should be taken by directors in the event that a company is insolvent or is likely to become insolvent.
