What-is-wrongful-trading-in-company-insolvency

What is wrongful business trading?

Wrongful trading happens when a director keeps trading even after knowing the company is broke and unlikely to bounce back financially. 

Section 214 of the Insolvency Act 1986 deals with wrongful trading and can make directors personally responsible for the company’s debts if found guilty.

 

What do we mean by wrongful trading?

Wrongful trading is when a director keeps trading even after knowing or should have known, that the company is insolvent with no realistic chance of avoiding liquidation due to insolvency.

Wrongful trading is a grave issue. If you’re a director of an insolvent company and fear breaching the Insolvency Act regarding wrongful trading, it’s crucial to promptly seek assistance from a qualified, licensed insolvency practice.

With a team of licensed insolvency practitioners nationwide, Vanguard Insolvency is well-positioned to assist.

 

Is an insolvent company always responsible for wrongful trading?

Even if a company is insolvent, it doesn’t automatically imply it’s beyond saving. Short-term cash flow issues, like customers delaying debt payments, can be common and may cause a temporary struggle for the company until payments are received.

Absolutely, a licensed insolvency practitioner might advise that an insolvent company keeps trading if the issues seem short-term and there’s a solid chance of recovery. 

This could be applicable if the company undergoes a rescue and recovery process, like administration or a Company Voluntary Arrangement (CVA).

The director of an insolvent company shouldn’t decide to keep trading on their own. This choice should only be made after consulting and receiving guidance from a licensed insolvency practitioner.

 

What are the consequences of a wrongful trading?

Wrongful trading is a severe offence. If a director is aware of their company’s insolvency but persists in trading, worsening the position of creditors and accumulating additional debt without a clear repayment plan, such actions will not be viewed favorably in any post-liquidation investigation into the company’s affairs.

It’s against the law to trade while insolvent if there’s no chance of recovery or if continuing won’t benefit creditors more. Legislation oversees wrongful trading, and the penalties can be severe.

Directors could face a ban from serving as company directors for up to 15 years through a Director Disqualification Order. If found guilty of wrongful trading, there’s also a potential for personal liability regarding certain company debts.


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Who can be considered as a ‘director’ of a company?

Regardless of having the official title of ‘director,’ you may still be accountable for wrongful trading. If you function in a directorial role, even without the formal title, pay, or benefits, you are legally regarded as a director. 

The legal criteria include being officially registered at Companies House as a director (‘de jure’) or acting as a director without formal registration (‘shadow’ or ‘de facto’).

If a director is discovered acting on behalf of a shadow director who has been previously disqualified or is bankrupt, the consequences may involve imprisonment.

 

Solvency Test as Defined by the Insolvency Act 1986 

Keep in mind, that insolvency isn’t necessarily permanent, but it’s crucial to identify signs of a company in insolvency or approaching that state. As per the Insolvency Act 1986, insolvency can be determined by addressing these questions:

1. Do your company’s liabilities surpass its assets?

2. Can you not afford to settle your company debts when they become due?

If the response to those questions is affirmative, it’s reasonable to think your company might be insolvent. 

When uncertain, seek advice. Insolvency is a serious matter, and as a director, you’re legally obligated to prioritise the interests of your creditors once you acknowledge your company is in such a situation.

If you’re worried about the future of your limited company or already suspect insolvency, Vanguard Insolvency offers a free consultation with a licensed insolvency practitioner.

Depending on your company’s situation, it might be crucial to halt trading immediately to minimise losses to creditors. Nevertheless, in certain circumstances, you may be allowed to continue trading if it serves the best interests of your creditors.

A licensed insolvency practitioner can offer the expert assistance and guidance necessary for making the right decision. 

Contact our expert team today at 0121 769 1915.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.