In a nutshell wrongful trading is where the directors should have known better than to just let the insolvent business carry on getting worse but they do nothing about it.
Wrongful trading is a serious claim and directors can be pursued personally for this.
The phrase the directors really do not want to hear is ‘wrongful trading’.
This occurs when the directors of a company traded a company after they knew, or ought to have known, that there was no reasonable prospect of avoiding liquidation and they did not take every step with a view to reducing the loss to the company’s creditors.
Who is at risk of such claims and what happens?
The appointed directors are at risk of such claims being brought against them but so are shadow directors. These are individuals who are not registered as directors but may well be a controlling person behind the business and who act as directors without any formal appointment as such. Quite often shadow directors are a large shareholder or a significant funder of the business.
Wrongful trading can only be brought in certain situations and where a company has entered a formal liquidation or administration. Previously a claim could only be made by a liquidator but the law has recently changed giving administrators to also pursue wrongful trading claims
A claim comes about because a liquidator / administrator has a duty to investigate the reasons for failure of a limited company and may decide the directors did not act reasonably. Frequently it is creditors who are owed money who push for this remedy and fund the legal action.
What will the IP need to prove to bring about a successful claim?
A wrongful trading claim is made under S.214 of the Insolvency Act 1986.
Apart from proving that the directors continued trading after insolvent liquidation / administration was inevitable, the IP will need to show that the directors should have done something based on the skills of a reasonably diligent person. The directors will have a higher duty of care if they were professionally qualified.
The IP has to establish a date that the company can be shown to be insolvent and then prove to the courts satisfaction that it was unreasonable for the directors to continue to trade.
What are the consequences?
If wrongful trading can be proven an IP will obtain a court order that the directors are held liable to pay the company in liquidation whatever sums the court sees fit.
In addition it will lead to a negative report being filed by the IP with The Insolvency Service who are likely to disqualify the directors from acting for any company in the future.
One of the best defences for directors is if they took professional advice and acted upon it.