Identifying the Symptoms of Wrongful Trading

Author: John A. Waller. Consultant. Reviewed July 7th, 2024.

Identifying the symptoms of wrongful trading of a limited company remains the most critical issue for a company director.

Wrong trading while at the helm of a limited liability company is serious. Directors remain obliged to identify the symptoms of illegal trading, as ignorance is no defence. Additionally, it is essential to determine when your business is insolvent.

It is crucial to understand the duties and responsibilities of the director.

Wrongful trading happens when directors continue to trade when they know or should know that directors cannot avoid insolvency. The Insolvency Act 1986 outlines the duties required of a director. If they fail to use “every step to minimise the potential loss to the company’s creditors.” Then, directors expose themselves to possible liability claims personally. Directors must ensure they act reasonably and responsibly while ensuring that the company’s creditors remain protected and rank first in any decision rather than shareholders or themselves. Failing this, they may face ‘Wrongful Trading Allegations’. They face prosecution and up to a 15-year ban as a director.

Once a company is insolvent and requires a liquidation, the liquidator must scrutinise the director’s past conduct to the liquidator’s appointment date for the past three years. If the liquidator finds evidence of the directors trading while insolvent, this is proof of wrongful trading. The report by the liquidator is then presented to the Secretary of State for consideration. They then may proceed with a director’s ban and hold the directors liable for the company’s debts if it is proven the company traded indolently with intent.

Contractors & Identifying the Symptoms of Wrongful Trading

When a company performs well, the director’s priority remains to pay dividends to the company’s shareholders. However, should trade start to falter and the company experience financial? Directors remain legally required to protect the company’s creditors over and above the shareholders. Contractors directing a limited company in trouble in the UK must operate the company in its creditors’ interests as an absolute priority. Failing to do so runs the risk of liability for losses incurred by the company for the contractors.

Companies who:

  • Continue trading while insolvent; 
  • Wrongfully trade.

Hoping that trade improves, the company’s failure is beyond rescue and no longer viable.

We highlight some of the most common indicators of wrongful trading and what, perhaps:

  • Accumulating arrears of any tax;
  • Not filing the company annual returns;
  • Securing credit from suppliers while knowing that the company will not honour repayment;
  • Failure to file annual accounts of the company at Companies House;
  • Accumulating significant levels of debt;
  • Trading when your company is insolvent;
  • Paying yourself a salary that causes cash flow issues for the company;
  • Repaying a loan to a director in preference to the company’s creditors;
  • Allowing clients to leave deposits, knowing the order will not be performed;
  • Suppliers make deliveries to your company when directors know they will not receive payment.

In defence, contractors should do the following:

  • Cease IMMEDIATE trading. Ensuring no creditor of the company’s position is negatively affected because the business traded on through insolvency assured;
  • Perform no transactions at the undervalue at all;
  • Retain and maintain accurate books and records at all times. Directors must make copious notes on decisions to justify their actions upon financial issues. The latter is essential if an action is taken against the directors so they have evidence to explain either the liquidator or the insolvency service.
  • Make sure no preference is given to you or other parties. Company creditors must be treated equally if they have not secured or legally held preferential status. Under no circumstances must creditors of the company be paid before others;
  • Do not run? Face the problems and remain in control. Demonstrate your wish to resolve matters. Failing to do so allows issues to go out of your control and open you to criticism later. Failing to protect creditors;
  • Ensure you seek immediate professional advice, preferably from a licensed insolvency practitioner, to ensure that you perform what the IP asks and that creditors are protected. Essentially, be proactive in identifying the symptoms of wrongful trading.

Identifying the Symptoms of Wrongful Trading. The IP may request you consider: 

Appoint an administrator to sell the company through a pre-pack administration or a company administration to protect the company from creditors quickly while turning the viable company around.

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