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.
There was a relatively large rise in the number of Joint and Several Liability (JSL) Notices in the last year. ... more
According to recent data from the Insolvency Service, the construction sector remains one of the industry areas ... more
According to Charity Debt Justice, around 6.7 million people in the UK are considered to be in financial ... more
In the run-up to the election, the current government made some very clear promises that could have quite an effect ... more
There is always bound to be a question about when it is the right time to push the button on a member's Voluntary ... more
When you are responsible for a business that is facing insolvency, or potentially facing personal financial issues ... more
Here we go again. The election is ramping up and the media are dissecting every statement and promise in search of ... more
What happened between John Barnes Media Limited and HMRC? According to the Insolvency Service news, John Barnes ... more
One of the actions taken during an insolvency is for the company assets to be sold to help pay debts. This is ... more
The politics of a budget are not really in our area of interest, to be honest. The motivations behind decisions ... more
There have been a couple of dramatic looking statistics about company closures and recessive economies recently. ... more
HMRC have issued an update to how Members Voluntary Liquidations (MVLs) are processed. The change is quite a shift ... more
According to the Office of National Statistics (ONS), retail sales fell 3.2% in December 2023. With a harsh outlook ... more
Christmas is around the corner, and the last bell is about to ring for 2023, so it’s a good time to sit back ... more
We are all aware that a business can become insolvent - but what about the over 168,000 charities currently ... more
This year the Autumn statement was a bit of a mixed bag for business and individuals. National insurance giveaways ... more
Do personal finances impact business finances? When you run a business, one of the first things any of your ... more
The jump in insolvencies in September follows a similar increase in August. However, there was a drop in July. So ... more
Bankruptcy and insolvency are not the same thing, but they are closely related. Maybe that is why they are ... more
Economic sunshine and showers. We have gotten used to having a more Mediterranean style summer in the last few ... more
It often still comes as a surprise to directors when they learn that they can claim redundancy. If you meet the ... more
Does being local matter? After all, insolvency is about logic and process, isn’t it? To answer that ... more
Warning: Insolvency Service ... more
The recent budget may well have not been much of a shake up for the economy but it did contain some things to need ... more
Can I be disqualified as a director over a Bounce Back Loan? Let’s deal with the big questions first. In ... more
What happened with Capital Gains Tax and MVLs? To be clear from the outset if you are thinking of closing your ... more
A year of financial white water 2022 started with a lot of hope, didn’t it? By the end of January Covid ... more
What’s going on in Hospitality? You cannot help but feel for pubs, restaurants, and other venues. It must ... more
It isn’t unusual that a director of a company will have an outstanding director’s loan account. If that ... more
What makes a good Insolvency Practitioner? There are some fundamental skills and experience that should really ... more
What does ‘intent to appoint administrators’ mean? If you have been keeping up with the news ... more
Green, amber, and red lights of insolvency If we were to make a list of things that directors usually tell us ... more
How bad are things for business? You can’t help but notice that the economic news is pretty grim at the ... more
Personal guarantees can be a problem when a business becomes insolvent, and directors are often concerned about ... more
What happened to the insolvency crisis? Back in what now feels like aeons ago during 2021, there were rumblings ... more
The cost of business crisis. Without knowing your expenditure, it is almost impossible to make a sound judgement ... more
The importance of honesty. There is nothing the press likes more than a celebrity scandal and former Wimbledon ... more
You have probably seen various stories in the press about Directors of businesses being caught out because they ... more
Why do people consider a Members Voluntary Liquidation? Unlike insolvency, which is driven purely by financial ... more
When the insolvency legislation was temporarily changed during the pandemic, I suspect there was a widespread sigh ... more
I heard a wonderful phrase to describe the current situation the other day. Someone said they would be glad when ... more
If you run a business and don’t currently have cashflow planning at the top of your agenda, you probably ... more
Yes, for those of you that watched ‘Game of Thrones’ you will appreciate that this is the threat of bad ... more
As you will appreciate, during the pandemic HMRC has been very busy dealing with the various support schemes, ... more
Companies in financial distress as a result of the pandemic have been protected from creditor action since last ... more
When a Company fails it is quite common that directors are excused of Wrongful or Insolvent trading. Wrongful ... more
This is the fourth time I have written about the Government extensions of the insolvency provisions brought in ... more
I the first of these BBL articles we looked at your options if you are struggling to pay your Bounce Back Loan ... more
Bounce Back Loans are becoming a big problem area and we may only be scratching the surface of the impact they may ... more
The Government has announced a new scheme to help individuals with debt problems. The scheme is described as ... more
First of all, it is fair to say this blog is very technical and probably more for our professional contacts, so if ... more
The Insolvency Service produces monthly figures for both corporate and personal insolvencies and as mentioned ... more
The answer to the question ‘when is a good time to close your solvent business’ is never an easy one. ... more
Why Groundhog Day you ask? Over the last 12 months, I have posted about various Governments measures brought in ... more
Believe it or not, it has been almost 12 months since businesses in the UK were first given an answer to the ... more