Identifying the Symptoms of Wrongful Trading

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

Wrongful trading whilst at the helm of a limited company is serious. Directors remain required to identify the symptoms of wrongful trading, as not knowing is no defence.

It is essential to understand the Director’s Duties and Responsibilities.

Wrongful trading occurs when directors continue to trade when they know or should know that directors couldn’t avoid insolvent liquidation. The Insolvency Act 1986 outlines the duties required of a director. If they fall into failing to use “every step to minimize the potential loss to the company’s creditors.” Then, they expose themselves to possible liability claims personally. Directors need to ensure they act reasonably and responsibly, while providing the company’s creditors remain protected and rank first in any decision made, rather than shareholders or themselves. Failing this, they may face ‘Wrongful Trading Allegations. They face prosecution and a lengthy ban as a director.

Once a company is insolvent and requires a liquidation. The liquidator must scrutinize the director’s former conduct for the past three years to the liquidator’s appointment date. If proof of wrongful trading is proven, then it’s 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 proven the company traded indolently with intent.

Contractors & Identifying the Symptoms of Wrongful Trading

When a business is performing well, the director’s priority remains to pay dividends to shareholders of the company. However, should trade start to falter and the company experience financial? Directors remain then 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, run 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 though, the failure of the company is beyond rescue and no longer viable.

We highlight some of the most common indicators of wrongful trading, and what perhaps is the best way forward

• Accumulating arrears of any tax;
• Not filing the companies annual returns;
• Securing credit from suppliers, while knowing that the company will be unable to honour repayment;
• Failure to file annual accounts of the company at Companies House;
• Accumulating significant levels of debt;
• Trading while the 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 creditors;
• Allowing clients to leave deposits, understanding the order will not be performed;
• Suppliers making 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 position is impacted negatively 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. Upon issues that arise financially, directors must make copious notes on decisions made to justify their actions. 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.
• Ensure no preference given to you or other parties. Company creditors require equal treatment unless secured or legally held preferential status. Under no circumstances must any 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 from now. Failing to protect creditors;
• Ensure you seek immediate professional advice, preferably from a licensed insolvency practitioner, ensuring you carry out what is asked of you by the IP, ensuring creditors are protected.

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

• Approaching HMRC to arrange a ‘Time to Pay arrangement’ if accepted by HMRC:
• A ‘Creditors Voluntary Liquidation‘ if the business is no longer viable;
• Propose a ‘Company Voluntary Arrangements‘ to repay creditors of the company if viable?

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