Wrongful trading, Insolvent trading – What is it and what does it mean?Posted: Aug 5, 2021

When a Company fails it is quite common that directors are excused of Wrongful or Insolvent trading.

Wrongful trading, sometimes called insolvent trading, is quite a complex area to discuss and is based on the facts of each individual case so advice should be sought if you think this applies to your company.

What is the definition?

This is when the director(s) knew or ought to have known that their company was insolvent and continued to trade incurring further losses after this date. If this can be proved, then an order can be made to make the director(s) personally liable for the losses after this point in time.

What does this mean?

So, we have a technical definition but in truth it is always difficult to know when the director ‘knew’ or ‘ought to have known’ when the Company was insolvent. The test the courts use is a subjective one, so if the same facts were given to another person what would they think. This does mean that if the director has a higher level of skill, for example, a qualified accountant, it is assumed that their level of knowledge would be higher than another director.

Common examples of showing that the company has reached the stage of insolvency will be outstanding County Court judgements (CCJs) or long outstanding HMRC debts. The logic is that this is evidence that the director should be aware of these events, and they suggest that the Company is insolvent. These may be in place, but a director may have had a reason to assume the Company could continue, for example they are aware of a potential investor.

It should be noted that claims for wrongful trading are reasonably rare because of the need to prove what the director knew or should have known.

If I am in this position, what should I do?

There are many situations where a company may be technically insolvent. For example, when a company has got behind with HMRC debts. However, they may have arranged a time to pay arrangement so, whilst they need to be careful, it does not mean that the company should cease to trade.

So, what should you as a director do if you are in this position?

· First, you should take advice, whether this is from an insolvency practitioner or another professional. Document the advice that you receive.

· Second, we would recommend that you minute the Company position on a regular basis, monthly as a minimum but maybe more often if the position becomes critical. These minutes should include the financial position of the company; the positives moving forward, for example, new orders or proposed investments and the negatives, threats of action from creditors. A summary of the cash position and a conclusion of why the director(s) feel it is fair to continue to trade.

· Finally keep details of the dates of critical events whether that is talks with investors or threats of legal action.

As mentioned above this is a very technical area of insolvency and it is recommended that you take advice. We are happy to have a chat and please feel free to book a 20-minute call.

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