What Is Wrongful Trading?
- Allows the business to continue to trade when they knew – or ought to have known – that the business was insolvent
- Failed to protect the interests of company creditors
When a company is in a state of insolvency, it becomes the director’s statutory duty to place the interests of creditors first, not the interests of the business. If you continue to trade when insolvent, you risk making the position of creditors worse, thereby failing to meet this duty.
In this article we’ll be exploring what qualifies as wrongful trading, what are the potential consequences, and how you can protect yourself.
Contents
How Do I Know When My Company Is Insolvent?
According to the Insolvency Act, insolvency can be identified by answering two simple questions:
- Do the liabilities of your company exceed its assets?
- Are you unable to pay your company debts when they fall due?
If the answer to these questions is “yes”, your business is likely insolvent. This is important, as it means that you are now under a legal obligation to act in the interest of creditors.
What Actions Can Indicate Wrongful Trading?
Directors facing insolvency are often forced into certain decisions in order to keep the company afloat. If you’re carrying out any of the following, it may be a sign of wrongful trading:
- Taking credit from suppliers or lenders when there isn’t a reasonable prospect of repayment
- Taking payments from customers and failing to deliver the due goods/services
- Selling stock/equipment below market value
- Making preferential payments to creditors you have a personal guarantee with
- Failing to make PAYE/NI payments while still paying yourself
- Failing to file the necessary Companies House documents
- Claiming business VAT while not paying VAT
What Are the Consequences of Wrongful Trading?
The court can apply a range of penalties to directors found liable for wrongful trading.
Directors can be made personally liable for a portion of the company’s outstanding debt. If you’re unable to afford the repayment of these debts, you could be forced into personal bankruptcy, resulting in the loss of your personal assets.
The court can also issue director disqualifications. This could prevent you from being a director again in the future for anywhere between 2-15 years.
The court may also issue fines towards liable directors.
Penalties will depend upon the severity of the offences made. In some severe cases, directors will be charged with fraudulent trading instead of wrongful trading, eliciting heavier penalties.
What Is Fraudulent Trading?
Fraudulent trading, unlike wrongful trading, is a criminal offence. It is also outlined in the Insolvency Act 1986 and is warranted by similar actions. However, fraudulent trading is distinguished from wrongful trading by deliberate and malicious director intent.
The increased severity of the offence is mirrored in the severity of the punishments the court can apply to guilty directors. The court is likely to make directors personally liable for larger portions of company debt, issue heavier fines, and disqualify directors for longer.
In some cases, the court may even sentence guilty directors to up to ten years in prison.
How Do I Protect Myself from Wrongful Trading Claims?
One of the most common ways for directors to become liable for wrongful trading is by continuing to trade until they’re forced to close by creditors. This is often done in the hope of achieving a turnaround. While turnaround is sometimes possible, this course of action isn’t the way to achieve it.
If it appears that there is an opportunity for a successful business turnaround, you may be advised to pursue a CVA or company administration. If the insolvency appears terminal, you’ll be advised to pursue a CVL, providing a safe route of business closure.
Each case is different, so we encourage you to get in touch with our advisors before making any big decisions. If you’re worried that your business is insolvent, get in touch to arrange a free consultation today.
