Company directors are no longer protected for wrongful trading

Category: News

Soon after the economic lockdown began, the Government introduced legislation assisting directors battle the financial effects of the coronavirus.

The suspension of what is known as wrongful trading was a key part in this battle; directors should not continue to trade when a company is insolvent. Robust businesses were suffering badly at the start of the pandemic, and this measure was seen as an important step.

This suspension expired on 30 September 2020. It’s now really important that they are aware of the implications should their company become insolvent.

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When is your company ‘insolvent’?

This is not always clear. However, as you’d expect, insolvency will arise where a company can no longer afford to meet its financial liabilities. A company will be considered insolvent if any of these conditions are met:

  • To satisfy a statutory demand. This is a formal demand made by a creditor for a debt which is not disputed. If your company does not pay the demand within 21 days the creditor is free to petition for the company’s insolvency.
  • Failure to satisfy enforced rights. This is where creditors seek to enforce their contractual rights (often where debts have been secured against company assets) but the rights are not satisfied.
  • Cash flow insolvency, where the debts of a company cannot be paid on time.
  • Balance sheet insolvency. This is where the liabilities of a Company exceed its assets.

What is wrongful trading?

Where a Company enters the process of either liquidation or administration, the conduct of the directors will be examined. Those Directors who continued to trade after entering an insolvency process, are likely to be liable for wrongful trading.

Any Directors found liable, can be held personally responsible for the company’s debts.

How can a director be found liable of wrongful trading?

As a director, you owe various duties to your company. If you identify (or even if you should have identified) that the company has become insolvent you owe a duty to promote the success of the shareholders and the company’s creditors. Ultimately, if the company is insolvent, priority will need to be given the creditor’s interests. In such circumstances, a director may become liable for wrongful trading in one of several ways.

Firstly, if you continue to allow the Company to trade. But also, if you are found not to have taken every reasonable step to reduce the risk to creditors. This may mean suspending credit accounts, not entering into further transactions or seeking to agree payment plans with creditors. 

Finally, directors will be found liable if they have continued trading with the intent to defraud creditors.

Next steps

Given that this suspension has now been lifted, directors should stop and take everything into account. They need to consider their own liabilities if their company is in financial difficulties.

We’d strongly suggest that Directors should consider the following practical measures: –

  • Ensure an accurate and comprehensive record is kept of all decision making. This should include any board minutes. This is one way to show that the company’s financial health is regularly considered. And also appropriate steps, in line with a director’s duties, are being taken.
  • Flag any concerns you have concerning the company’s financial health with fellow directors and the company’s accountants.
  • Seek legal advice on your own position, if the company is going to enter either administration or insolvency.

Do bear in mind that resigning your post the moment the situation deteriorates is unlikely to protect you. This will not remove any liability you may have for the period that you were a director. There is also a risk that you breach your director duties if you are seen to be ‘abandoning the ship’.

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How we can help you

If you are concerned about your company’s position and would like to discuss your own liabilities, please contact our Commercial Dispute Resolution team. You can reach us on 01752 827014 or by emailing [email protected]