If your business cannot meet its liabilities, it may face insolvency. The law can pursue directors of insolvent companies if their conduct amounts to wrongful trading. This article will look at what directors of potentially insolvent companies should know about wrongful trading so you can limit your liability. <\/p>\n\n\n\n
Wrongful trading is a civil claim the law permits liquidators and administrators<\/a> of insolvent companies to bring against directors. Liquidators and administrators are two types of insolvency practitioners that take over the affairs of an insolvent company either at the company\u2019s request or a successful order made by one of its creditors. <\/p>\n\n\n\n Liquidators and administrators have broad powers to manage the company\u2019s affairs. Their primary objective is to manage the company for the maximal benefit of its creditors rather than its shareholders. To this end, they can review the conduct of the company\u2019s directors in the lead-up to the company\u2019s insolvency to determine if their conduct fell below the standards imposed by law. If it does, the court can order the directors to personally contribute to the company\u2019s assets. <\/p>\n\n\n\n This article is only concerned with wrongful trading in the context of an insolvent company. Other avenues of potential liability include, misfeasance, fraudulent trading, other forms of fraud and breach of directors’ duties.<\/p>\n \n In some cases, these various forms of liability may overlap. For instance, often a director found liable for wrongful trading may also breach one or more director duties. If you are concerned about your company\u2019s solvency, seek immediate legal advice to minimise your liability.<\/p>\n <\/p>\n<\/div>\n\n\n\n Only directors<\/a> can face liability for wrongful trading claims. Therefore, the law cannot hold you liable if you are just a shareholder. However, while you may not be officially a director, you may be a shadow or de facto director<\/a>. <\/p>\n\n\n\n The liquidator or administrator must prove to the court that the directors failed to take every step to minimise the potential loss to the company\u2019s creditors when the company could not be rescued from insolvency. We can break this down into four elements, all of which the liquidator or administrator must prove.<\/p>\n\n\n\n The first two elements are usually self-evident when a company is either in insolvent liquidation or administration. That is to say, the liquidator can point back in time and identify when the company\u2019s performance could not be turned around. However, if the company can still be rescued – for instance, through a capital injection or asset sale – there is no claim for wrongful trading.<\/p>\n\n\n\n Before attaching liability to a director, the court considers whether a reasonably competent director would have decided their company is beyond the point of no return. <\/p>\n\n\n\n This is an objective standard, meaning it does not matter if the directors did not reach the conclusion. If a reasonably competent director would have reached the decision, liability follows.<\/p>\n<\/div>\n\n\n\n However, if the director holds particular skills or experience that suggests they should be held to a higher standard, the court will do so. This means that all directors have to meet a minimum threshold of competency, such as by:<\/p>\n\n\n\n But if a director is also a chartered accountant, their conduct is held to this higher standard.<\/p>\n<\/div>\n\n\n\n If the liquidator or administrator convinces the court that the director failed to meet the reasonably diligent person test, liability follows unless the director can satisfy the every step defence. <\/p>\n\n\n\n A director will avoid liability if they can demonstrate that when the company reached the point of no return, they took every step to minimise the potential loss to its creditors. The key word here is \u201cevery step\u201d. If there are avenues that the directors could feasibly have taken but did not, they are unlikely to establish a defence. <\/p>\n\n\n\n Taking \u201cevery step\u201d can include:<\/p>\n\n\n\n You should note that resigning as a director is not an absolute defence if a director otherwise fails to meet the every step defence. However, if an individual director raises these concerns and solutions and fails to persuade other directors, resignation may be appropriate.<\/p>\n<\/div>\n\n\n\n You should also note that wrongful trading does not require the court to find evidence of dishonesty. However, mere negligence or failing to take a specific action can be sufficient to establish liability. This differs from fraudulent trading, where dishonesty is an essential ingredient. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nHow is Wrongful Trading Defined?<\/h2>\n\n\n\n
Element<\/strong><\/td> Explanation<\/strong><\/td><\/tr> The point of no return.<\/strong><\/td> This refers to establishing that at some point before insolvency proceedings began, there was a point at which the company could not be rescued. <\/td><\/tr> The reasonable conclusion.<\/strong><\/strong><\/td> At that point, it was reasonable to conclude the company could not be rescued.<\/td><\/tr> Directors\u2019 failure to reach the conclusion.<\/strong><\/td> The directors failed to reach that conclusion.<\/td><\/tr> Absence of a defence<\/strong><\/strong><\/td> The directors did not take every step available to them to minimise the potential loss to the company. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Reasonably Diligent Person Test<\/h3>\n\n\n\n
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The Every Step Defence <\/h3>\n\n\n\n
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