What is Wrongful Trading?

The Corporate Insolvency and Governance Act 2020 (“GIGA”) suspended wrongful trading provisions by requiring the court to assume that a person is not responsible for any worsening of the financial position of the company (or its creditors) that occurred during the relevant period.  The relevant period began on 1 March 2020 and ended on 30 June 2021. 

These provisions protected businesses facing unprecedented uncertainty, as a result of Covid-19.  Their recent expiry means that company directors are once again at personal risk, if they allow a company to continue past the point at which there was no longer any reasonable prospect of avoiding insolvent liquidation.

Although it is perfectly plausible that the impact of the pandemic will be cited as a reason for a company’s failure for months, or even years to come, any director concerned about their company’s financial future should seek early advice to ensure that their position is protected, if they decide to continue trading.

Wrongful Trading and Directors’ Duties

If a company is insolvent (for example, it cannot pay its debts as and when they fall due), or it is likely to become insolvent, a director can become personally liable for company debts if the company enters insolvent liquidation, prior to which they failed to carry out their duties with the appropriate level of skill and care.

Personal liability can arise if a director knew, or should have concluded, that there was no reasonable prospect the company would avoid insolvent liquidation, and failed to take every possible step to minimise the potential loss to the company’s creditors. 

How can you reduce the risk of wrongful trading?

There are a number of practical steps which you should take to mitigate any potential risk:

• Hold regular meetings to review the company’s financial position, and projections for the future. Document any decisions to continue trading and the basis on which those decisions were made.
• Maintain and review management accounts and contrast these with any projections that have been prepared. If these differ significantly, consider whether the projections you have are realistic and achievable.
• If the company’s financial position worsens ensure that you seek early advice from a licenced insolvency practitioner to assess the options available.

The consequences of wrongful trading can be significant, and not limited to a disqualification order, or disqualification undertaking.  The consequence could be a financial liability, such as a liability to pay company debts which accrued from the relevant point, and fines.

What are the warning signs of wrongful trading?

Common signs that a company is insolvent, and therefore that directors are at risk of liability from wrongful trading include:

• Exceeding credit limits on business facilities, or being refused further credit
• Making late payments, or using delaying tactics when communicating with creditors
• Failing to keep up to date with tax liabilities and allowing arrears to steadily increase
• Failing to keep up to date with VAT liabilities resulting in increasing arrears
• Persistent cash flow issues or lack of working capital

Another serious sign of wrongful trading is taking credit from suppliers and/or deposits from customers where there is no reasonable prospect of repaying the supplier or delivering the product or service for which the deposit was paid.  These examples are not exhaustive and if any of them apply to your business then you should seek urgent advice.

What about other Directors’ Duties?

Directors’ have various duties under the Companies Act 2006, and the following are perhaps the most relevant where a company faces financial difficulties:

• duty to promote the success of the company for the benefit of its members as a whole;
• duty to exercise independent judgment; and
• duty to exercise reasonable care, skill and diligence.

Contact Insolvency Practitioners

If you require any further information, help or advice please do not hesitate to contact us for a no obligation discussion.

Keywood Group is a Licenced Insolvency Practice with offices in Birmingham and London and our team has extensive experience in advising directors on their options.  We work with you to assess the options available, and the consequences of any conclusions you reach.