Wrongful trading occurs when a company’s directors have continued to trade when they knew, or should have concluded, that there was no reasonable prospect that the company would avoid insolvent liquidation or insolvent administration.
Ordinarily, a director is under a duty to act in the best interests of a company and its shareholders. However, when a company becomes insolvent, a director must act primarily in the interests of a company’s creditors.
If a director considers that a company may be or become insolvent, either on a balance sheet or cash flow basis, they are obliged to take all necessary steps to minimise losses to creditors. This overriding duty to creditors arises both from a common law duty and indirectly from the Insolvency Act 1986.
If a director allows a company to continue to incur liabilities, they may incur personal liability for the losses sustained by a company’s creditors from the point the directors knew, or should have known, that the company was insolvent and that they did not take the necessary steps to minimise creditor losses.
The court will not require a director to contribute to the assets if (after the time when they first concluded, or ought to have done, that insolvency would not be avoided) they took every step intending to minimise the potential loss to the company's creditors, as ought to have been taken.
At Crowe, we have a team of experienced and licensed Insolvency Practitioners who can advise you on the best course of action, depending on your business’s circumstances. Please get in touch with either Vince Green or Steven Edwards who are licensed Insolvency Practitioners, or your usual Crowe contact.