What Is Wrongful Trading? And Can I Trade out of Insolvency?

December 21, 2018

If your business becomes insolvent or is likely to become insolvent, your duties as a director shift away from your shareholders to your creditors.

This shift means directors must manage an insolvent company differently.

Failure to properly comply with your duties in such a situation could result in you being held personally liable for wrongful trading. Wrongful trading is a form of mismanagement of a company that ends up in insolvency. In this article, I'll dig into wrongful trading in a bit more detail and will discuss whether or not you can trade your way out of insolvency.

 

What is wrongful trading?

Wrongful trading occurs where a company continues to trade, without good reason, whilst it is insolvent in such a way that its creditors’ positions get worse.

With wrongful trading, the directors haven’t set out to defraud the company’s creditors but they have exhibited poor judgement and/or have failed to carry out their duties as a director. In my experience, wrongful trading usually occurs when a business begins to struggle and the directors blindly continue to trade, hoping things will somehow improve on their own.

It is not a defence for a director to argue that they were unaware of the insolvency, that they didn’t mean to allow the creditors’ position to worsen or they didn’t intentionally harm the creditors.

As I mentioned in the introduction, if directors engage in wrongful trading, they can be made personally liable for company debts. They can be taken to court and banned from acting as a director.

 

Is it the same as fraudulent trading?

The simple answer is no. Fraudulent trading is a criminal offence (wrongful trading is a civil matter) where a director has intentionally acted to defraud creditors.

 

Can I still trade if my business is insolvent?

While businesses can trade when insolvent, they must do so with important conditions and considerations. The most important point to make is that the company should only continue to trade if the directors have a reasonable and ongoing belief that it will improve the creditors’ position.

In some instances, it may even be in a director’s duty to continue to trade. For example, if a company can be saved or sold as a going concern by continuing to trade, it will be in the creditors’ best interests.

As you can see, if a company is facing insolvency, it is not automatically the right thing to do to stop trading as that will almost certainly result in some level of loss to the creditors.

Ultimately, there's no definitive right or wrong answer to whether a company should continue to trade when insolvent. What's important is the directors accept the seriousness of the position, seek suitable advice and make informed decisions that are in the best interests of the company’s creditors.

 

What should I do if my business is insolvent?

If your business is insolvent or is at risk of becoming insolvent, you should quickly seek insolvency advice from a regulated and licenced insolvency professional such as an insolvency practitioner.

The sooner you take advice, the more time you give your advisor to work with and the better the chances of a successful recovery.

Taking such advice will not only increase the chances of saving your business but it will also protect the directors’ personal positions. If you seek advice, your advisor will analyse your company’s finances and circumstances then recommend the best course of action moving forward. If it is in the best interests of your creditors, you may be able to continue trading without falling foul of the Insolvency Act 1986.

If you believe your company is insolvent or think it will become insolvent, contact our team today for free, confidential and non-judgemental advice. We will quickly investigate your specific circumstances and discuss what options are available to you.

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