How is a Wrongful Trading claim calculated and pursued and could a Director have any defence?
The Wrongful Trading (WT) claim is for the additional loss suffered by creditors as a result of the Directors trading on insolvently following the point at which they ought to have known that there was no prospect of avoiding an insolvency.
The loss claim is, therefore, the movement from an identified point in time when any reasonable director ought to have known (objective test), or the point when the particular director ought to have known (subjective test), to the date the company enters liquidation.
An example a WT claim is a follows: –
- Filed accounts for YE 31 December 2015 = insolvent balance sheet (net liabilities of £348k);
- Entered liquidation on 10 October 2017 = total deficiency to creditors of £1.33m;
- The position had therefore worsened by £982k in this period;
- The claim was easy to prove as the filed accounts were signed by the Director in question (an Accountant) and the company had suffered a considerable loss of turnover following the loss of several major contracts with customers, prior to the signing of the YE accounts;
- It was evident from the changes in financial positions that considerable assets of the company had been dissipated in order to enable loss making trading to continue;
- The Liquidator pursued a WT claim against Director for this additional loss (£981k).
How is a WT claim pursued?
Usually, the Liquidator would identify a claim and bring this to the attention of the Director and seek explanations as to why the position was allowed to deteriorate. At this point the Liquidator may seek to negotiate a settlement from the Director, in order to avoid the legal costs and risks associated with taking the matter to Court.
The costs of pursuing a claim can be prohibitive, especially if the Director refuses to accept any responsibility for their actions causing additional loss to creditors.
There are a number of practical considerations for a Liquidator when assessing any potential claim / the benefit of pursuing a WT claim, as follows: –
- Attitude of creditors – Do they feel harmed by the ongoing trading/have they raised the issue and asked for action?
- Value of claim – Small claims not pursued / must provide a benefit to creditors (i.e. not simply to generate fees)
- Funding available – Are there funds in the case to pursue a claim? Costs include the time costs of the Insolvency Practitioner & their Solicitor fees and Court costs. (NOTE: creditors must approve the action and the use of funds (or if there are no funds in the case then creditors may consider providing additional funding to pursue an action if the claim is significant and the prospects of success are good)
- Prospects of success – A WT claim is a civil action proven by a balance of probabilities (therefore easier to prove than a fraudulent trading claim, which is a criminal action and contains an intent to defraud creditors and must be proven beyond reasonable doubt)
- Ability to repay – Does the Director have any personal assets? (An unenforceable judgement is no good to anybody!)
Is there any defence for Directors?
There is only one defence for a Director when faced with a WT claim, which is that they took every step to minimise the loss to creditors.
Steps include: –
- Reducing overheads
- Safeguarding deposits
- Incurring no further credit (paying cash only)
- Preserve/protect assets (secure, insure, avoid liens, avoid set-off)
- Critical payments only (no payments to legacy creditors)
Seeking professional advice
Taking steps to initiate insolvency may limit WT liability, whereas resignation as a Director is not an option.
Information for Directors to consider
When faced with possible insolvency, the following information should be considered to support ongoing trading: –
- Statutory accounts
- Regular review of MI
- Ability to pay debts as and when fall due (cash flow test) (e.g. legal correspondence received, suppliers on stop, etc. may highlight cash flow issues)
- Board meetings should be held and minutes should document decision to continue
- Forecasts / turnaround plans (prepared, implemented and reviewed)
How we can assist
Although there is currently a suspension of the threat of personal liability arising from WT for Directors who have continued to trade a company through the crisis, this will not protect directors of businesses that can be shown were insolvent as at March 2020. Plus, Directors can still face misfeasance / breach of duty claims if they have acted in a way that a reasonably competent Director would not have acted.
We consider that there will be significant “fallout” for directors when the reliefs are eventually lifted as a result of The Finance Act.
If you have any concerns with ongoing trading, then we highly recommend seeking professional advice at the earliest opportunity to maximise the options available to you and your business.
We are happy to meet up (either in person or virtually) to discuss your concerns and explore the options available to you. This is free of charge and with no obligation.
The information was correct at time of publishing but may now be out of date.