Wrongful Trading: What every director should know

What is Wrongful Trading?

Wrongful trading is a legal term used in the United Kingdom to describe a situation where a company’s directors continue to trade a company while they knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation.

This can occur when a company is in financial distress and the directors continue to trade the company, incurring further debts, instead of taking steps to minimize the potential loss to creditors.

Is wrongful trading misconduct?

Wrongful trading is considered a form of misconduct and can result in personal liability for the directors of the company. Under the Insolvency Act 1986, the court can declare that a director is personally liable for any loss suffered by the company’s creditors as a result of wrongful trading. This means that the director may be required to pay compensation to the creditors out of their own assets.

The test for wrongful trading is whether, at the time the director knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation the director took every step with a view to minimizing the potential loss to the company’s creditors. This includes taking steps to seek professional advice, such as from an insolvency practitioner, and considering whether to appoint an administrator or liquidator.

It is important for directors to be aware of their responsibilities and to take steps to minimize the potential loss to creditors when a company is in financial distress. This includes keeping accurate financial records and seeking professional advice when necessary. It is also important for directors to be aware of the potential personal liability they may face in the event of wrongful trading.

Wrongful trading examples 

• Taking money from customers when orders can’t be fulfilled.
• Paying yourself a salary that the company can’t afford.
• Taking delivery of goods that the company can’t pay for.
• Amassing high debts to the detriment of creditors.
• Entering into credit agreements whilst knowing they can’t be honoured.

Is wrongful trading a criminal offence?

Wrongful trading is a civil offence, not a criminal offence. It is a term used in UK insolvency law to describe when a company’s directors continue to trade a company when they know or ought to have known that there is no reasonable prospect of the company avoiding insolvent liquidation.

The directors may be held liable for any losses incurred by the company’s creditors as a result of their actions.

Wrongful Trading Conclusion

Wrongful trading is a serious matter and it is important for directors to be aware of their responsibilities and to take steps to minimize the potential loss to creditors when a company is in financial distress. Failure to do so can result in personal liability for the directors and potentially severe financial consequences.

If you’re worried you may be guilty of wrongful trading the best thing you can do is seek confidential help and advice from us.

Call our expert team on 0800 088 2142