What is Wrongful Trading and what are the roles and responsibilities of Directors and Liquidators?
Section 214 of the Insolvency Act 1986 deals with Wrongful Trading.
Under this section, Directors may become personally liable to contribute to the assets of a company if the company was allowed to continue trading at a time when a Director knew (or ought to have known) that there was no reasonable prospect of the Company avoiding insolvent liquidation.
What is the role of the Liquidator?
The action is brought by the Liquidator, to recover funds for the benefit of the Company’s creditors who have been harmed by the actions of the Director, either as a result of the additional trading losses and liabilities incurred, or the dissipation of the company’s assets used to fund the ongoing trading.
It is the Liquidator’s job to assess the point at which the Director knew or ought to have known that the Company could not avoid insolvency (but continued to trade on anyway and caused a further loss to creditors) and calculate the additional loss suffered by creditors and bring an action against the Director under S214.
If proven, the Director can become liable to make a personal contribution equivalent to the loss caused by their actions.
This is a compensatory award, not a penalty, and is designed to punish incompetence.
Who is a Director?
The Insolvency Act 1986 defines Directors as “any person occupying the position of Director, by whatever name called”.
There are 3 types of Director: –
1) De Jure = listed at Companies House;
2) De Facto = acts and is treated as a Director despite no formal appointment;
3) Shadow = a person in accordance with whose instructions the Directors of the Company are accustomed to act.
CDDA legislation is designed to ensure that those pulling the strings, and telling directors what to do, don’t evade responsibility for breaches of duty for the simple fact that they are not formally appointed.
One of the many grounds for disqualification under CDDA is WT (max 15yrs).
The point that they ought to have known…
Every director has a fiduciary duty to use reasonable skill and care and act in the best interests of the Company. Once faced with insolvency, the primary duty of care is owed to the company’s creditors.
There is, therefore, an objective test regarding the point that they ought to have known that there was no reasonable prospect of the Company avoiding insolvent liquidation – being the minimum expected by a director as part of their general fiduciary duty.
When assessing a WT claim, there is also a subjective test regarding the point when they ought to have known, which looks at the Directors actual skill and experience and role within the business. For example, it would be easier to prove that a director ought to have known if, say, that Director was operating the role as Finance Director, with professional accountancy qualifications and day to day visibility of the financial performance of the company.
To find out how a WT claim is calculated and pursued and a defence a Director could take read this article How is a Wrongful Trading claim calculated and pursued and could a Director have any defence?
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.
If you would like to speak to Jimmy, you can contact him directly: –
The information was correct at time of publishing but may now be out of date.