Wrongful Trading Of A Limited Company

Wrongful trading of a limited company. Written by: John A Waller Consultant Updated June 5th,2024.

Wrongful trading of a limited company is “reckless trading” and “mismanagement” of a company in financial difficulties. It occurs when company directors continue trading when they are insolvent or should have realised however, there was no prospect that the company would.

This style of management often allows companies to trade while insolvent due to directors “actions.

Wrongful trading is a civil offence. Directors who continue to trade despite knowing the company’s insolvency risk liquidation or administration.

Trading in this way remains an offence. However, creditors have a way to recover money from directors guilty of this crime. They knowingly traded irresponsibly, without moral or financial care, to creditors “protection and to increase their potential loss.

Importantly, trading when your company is insolvent exposes directors to being banned for up to fifteen years. Company directors must be aware of what trading while insolvent mean.

It is essential identifying the symptoms of wrongful trading and avoid them.

INTENT is therefore the keyword. Usually, they do not aim to clear a debt or show regard, making fraudulent trading a civil offence.

As a director, you know ‘how to identify the symptoms of wrongful trading‘. If unsure call ‘the team at HBG Advisory, for ‘company debt advice and support available’.

Examples Of Wrongful Trading Of A Limited Company 

Directors must always know their company’s finances.

Neglecting this hinders business and prevents informed decisions to avoid trading issues.

Examples of wrongful trading:

  • Intentionally accrue debts to harm creditors.
  • Directors committing to credit agreements without ability or intent to pay.
  • HMRC debt increases though paying trade creditors, dividends or preferential payments.
  • Allowing deposits to be used for debt repayment rather than supplying goods.
  • Directors overpay themselves when the company is in debt to HMRC and others.
  • The company receives goods without payment or intention to pay.

Wrongful Trading of a Limited Company – UK Law

Who then remains liable?

Laws in the UK then only apply to limited company directors; they may refer to:

  • Shadow Directors – A person or persons who then act with power while not observed while hiding, but not an appointed director.
  • De facto Directors – A person not again named as a director makes decisions as a director. 

All of the above types of directors may be held personally liable if found guilty by the insolvency service.

At this point, it is therefore worth reading ‘Directors Duties & Responsibilities’.

Wrongful Trading Of A Limited Company – Insolvency Act 1986 – Section 214

Trading in the UK while a director remains governed by Section 214 of the Insolvency Act 1986. Like fraudulent trading, wrongful trading is when a director of a UK limited company, though conscious of its insolvency, takes no action to lessen the trading losses to the company’s creditors.

Section 214 outlines wrongful trading when a director knowingly allows the company to trade

  • The company has no evidence of avoiding insolvency.
  • They didn’t minimize trading losses for the company’s creditors.

For further help on support when not paying a supplier, please view ‘unable to pay companies’ suppliers.

Wrongful Trading Of A Limited Company & Companies Act 2006 – Section 993 

Therefore, the Companies Act 2006 ensures that all parties knowingly carrying on business will remain accountable for their actions while insolvent. If found fraudulent, then potentially exposed to prosecution, a custodial prison sentence and a substantive fine.

Wrongful Trading Provisions Suspension During COVID-19

The UK government suspended wrongful trading provisions between 1st March 2020 and 30th September 2020.

However, a new regulation was introduced November 26th, 2020, ending 30th June 2021. However, this has now been extended.

Directors should note that insolvency practitioners are witnessing limited companies with significant balance sheet losses due to the coronavirus COVID-19 pandemic. If appointed liquidators, they must recover as much money as possible for the company’s creditors. However, apparent breaches of duty or fraud can be determined concerning losses. When trading during COVID-19.

Investigation of Directors leading to Wrongful Trading

Although not definitive, the types of problems directors can raise when they operate a limited business can increase or be the leading cause of illicit trading.

  1. Deliberately omitting HMRC payments.
  2. Falsifying company records.
  3. Selling company assets at undervalue.
  4. Failure to keep accurate records.
  5. Supporting cash flow through deposits, without the ability to supply items.
  6. Repaying directors loans in preference to others.
  7. Loans by family or friends repaid when others are not.
  8. Failing to pay VAT owed.
  9. A director paying their salary in the knowledge that employees have remained unpaid, and or payment to HMRC remains unpaid.
  10. Obtaining goods by deceit, knowing payment will not be made.
  11. Repaying personal bank guarantees before company creditors.
  12. Contined to trade when insolvent and Trading fraudulently.
  13. Trading claiming VAT when unregistered.

Wrongful trading by directors is a serious criminal offense. So What happens to a director of an insolvent company.

Wrongful Trading of a Limited Company and Setting up a New Company After Liquidation

Once your previous company has been liquidated. Directors must understand the use of the company name after liquidation. Legal advice should be sorted on the use and use of brand names without any expressed authority.

For further guidance, please read ‘Use of company name after liquidation. If in doubt, please get in touch with a member of our team for further clarity.

For further reading on company insolvency, please view what is a business insolvency in the UK?

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