Wrongful trading is a practice which refers to the mismanagement of funds and irresponsible trading practices done on behalf of an insolvent company. This practice is specifically defined under UK’s insolvency laws and Section 214 of the Insolvency Act enacted in 1986. This Act was set up to help get funds/contributions to pay off creditors from those who managed businesses/companies which became insolvent.
Defining Wrongful Trading:
The wrongful trading principle was introduced in 1986 under the Insolvency Act as a complement to fraudulent trading practices. Unlike fraudulent trades, the threshold to find wrongful trading is far less and is a less serious offence. Wrongful trading is said to occur when the directors of companies trade past a point when they know that they insolvency and liquidation are inevitable. They are also held responsible for not trying to minimize losses that creditors will incur.
Defining of wrongful trading actions are usually taken liquidators appointed to manage a company once it is in “insolvency”. Insolvent liquidation could be voluntary or compulsory. If the liquidator notices unusual activity during the process of winding up, he can approach the Courts to order the people who knowingly indulge in such activities to contribute gains so made towards company assets.
Who is liable?
Section 214 of the Insolvency Act has a wide scope – it can be applied to formally appointed directors and also to those who take the post without an appointment.
In the process of establishing liability, the person in charge of the liquidation process has to provide burden of proof and establish that management engaged in wrongful trading, even when liquidation was inevitable. Liquidators should have skills to be able to read balance sheets and follow the money trail to prove insolvency. The fact remains that in the UK it is legal to keep trading even if a company is deemed insolvent. This is possible under the doctrine of “blue sky” defense whereby directors are believed to act in good faith to turn the company’s fortunes around. Liability is only attached when it is evident that the company will not be able to avoid the liquidation process. At any point in time, seeking a professional’s help for company debt advice is always a good decision taken.
When can wrongful trading be applied?
There are occasions when companies have increased tax burdens and are not able to pay off VAT or PAYE taxes. Creditors have been known to use wrongful trading as a tactic to try and recover money from directors and so on. Even though it is legal, it is not a good idea to give preference to one creditor over another. Directors can be held liable for funds to repay creditors. It is their personal responsibility to act with the interest of creditors in mind and those of employees as well.
What to Expect:
It is now a common practice for liquidators to sign agreements with lawyers for conditional fees and also take out insurance in case of adverse costs in case of an unsuccessful liquidation. There are companies that offer company debt advice which do commercial litigation and are able to not only manage but also fund the entire claim process.
