What is wrongful trading in company insolvency?

What is wrongful trading?

Wrongful trading is the act of continuing to trade after the point which the company director knew - or ought to have known - that the company was insolvent and that there was no reasonable chance of the company avoiding insolvent liquidation.

Wrongful trading is an extremely serious matter. If you are the director of a company you know to be insolvent and you are worried that you may be in breach of the Insolvency Act in terms of wrongful trading, you should make it a priority to seek help from a qualified licensed insolvency practice as soon as possible. With a team of licensed insolvency practitioners across the country, Real Business Rescue are perfectly placed to help.

Take Our Free 60 Second Test

Get an instant understanding of your:

• Debt and Asset Position
• Formal Insolvency Options
• Next steps

Plus much more ...

Start The 60 Second Test

Is an insolvent company always guilty of wrongful trading?

Just because a company is insolvent does not necessarily mean that it is beyond rescue. Short-term problems with cash flow are common, for instance customers not paying their own debts on time could lead to a company temporarily struggling until payment is made.

Indeed a licensed insolvency practitioner may recommend that an insolvent company continues to trade if the problems appear to be short-term and there is a good reason to believe that the company can bounce back from its current problems. This may be the case if the company enters into a rescue and recovery procedure such as administration or a CVA. 

The director of an insolvent company should not make the decision to continue trading themselves; this decision should only be made after discussions with - and directions from - a licensed insolvency practitioner.

60 Second Test Find Your Nearest Office

What are the penalties for wrongful trading?

Wrongful trading is a serious offence. If a director knows their company is insolvent yet continues to trade knowing they are worsening the position of their creditors and taking out additional debt knowing they have no plans of how they will pay their creditors, this situation will not be well received in any investigation into the company's affairs following liquidation.

It is unlawful to continue to trade while insolvent if there is no hope of recovery or if continuing to trade will not result in greater returns for creditors. There is legislation which governs wrongful trading and the penalties can be harsh.

Directors can find themselves banned from acting as a director of a company for a period of up to 15 years by way of a Director Disqualification Order. Personal liability for some company debts is also a possibility if a director is found guilty of wrongful trading.

Who is classed as a ‘director’ of a company?

Whether or not you have the title of ‘director,’ you can still be held liable for wrongful trading. If you are acting in the capacity of director; even without the title, pay and benefits, you are legally considered to be a director. According to law, the ‘test’ is: 

If a director is found to be acting on behalf of a shadow director who has previously been disqualified or is bankrupt then the penalties can include imprisonment.

Solvency Test as Defined by the Insolvency Act 1986 

Remember, insolvency is not always considered permanent but it is important to recognise the signs of a company which is insolvent or is approaching a state of insolvency. According to the Insolvency Act 1986, insolvency can be identified by answering the following questions: 

If the answer to those questions is yes, then it is reasonable to consider your company could be insolvent. If in doubt seek advice. Insolvency is serious, and as director you have a legal obligation to put the interests of your creditors first once you realise your company is in this position. 

If you are concerned about the future of your limited company, or already suspect it to be insolvent, Real Business Rescue can provide a free consultation with a licensed insolvency practitioner.

Depending on the position of your company it may be essential that you cease trading immediately to limit losses to creditors; however, in certain situations you will be permitted to continue trading should this be in the interest of your creditors. A licensed insolvency practitioner will be able to provide you with the expert help and guidance you need to make the correct decision. Call our expert team today on 0800 644 6080.