One of the duties of a director is to ensure that they act in the best interests of the company as a whole. A wrongful trading claim is made against the director when it is considered that they continued to trade the company when they knew, or ought to have known, that there was no prospect of the company avoiding an insolvent insolvency process.
The legislation is there to try and prevent companies continuing to trade resulting in larger losses for their creditors.
Insolvency Act 1986
A claim is made under S214 of the Insolvency Act 1986 and if the directors are found liable by the Court they can be required to make a contribution to the company’s assets.
Minimising potential loss to creditors
The main defence for a Director is that they took every step to minimise the potential loss to creditors, but how can a director do this?
- Hold regular board meetings and minute the reasons why trade is to continue
- Reduce credit taken on goods and services
- Ensure regular realistic cash flow projections are prepared
- Consider cost cutting and re-organisation
- Seek early professional advice
- Keep creditors up to date
Proving a wrongful trading claim
A claim for wrongful trading can be difficult to prove. The liquidators need to establish the actual loss. Simply by trading while insolvent will not automatically make the directors liable even if the company is eventually liable, especially if the directors have an expectation of an improving position.
So even when the Liquidators are able to prove all of the above it doesn’t mean that their claim will be successful as highlighted in the case of Ralls Builders Limited where the judge was satisfied the directors were guilty of wrongful trading but he did not order them to make a financial contribution. The judge considered that the liquidators had failed to establish that the decision to continue to trade had caused loss to the company.
If you are continuing to trade a company which is showing signs of financial stress it is always recommended you seek professional advice as soon as possible.