Wrongful Trading Of A Limited Company
Written by: John A Waller Director Updated December 19th August 2021.
Wrongful Trading of a Limited Company is “reckless trading” and “mismanagement” of a trading limited company.
Usually, with this management style, the company trades insolvent due to its directors’ actions.
To trade in this way is therefore an offence. However, creditors retain ways to recover money from directors guilty of this crime. Thus, they knowingly traded irresponsibly, without any moral or financial care, towards creditors’ protection and their potential loss to increase.
It is essential identifying the symptoms of wrongful trading and steer clear of them.
INTENT therefore, then remains the keyword. Usually, however, they do not intend to clear a debt or demonstrate greater regard.
As a company director, you understand the ‘how to identify the symptoms of wrongful trading‘. If uncertain, please call ‘the team at HBG Advisory, who will advise you on ‘company debt advice and support available’.
Company directors must understand ‘insolvency meaning in business’ to help avoid wrongful trading.
Wrongful Trading Of A Limited Company Examples?
Company directors must understand their company’s financial position at all times.
Without doing so, they will not manage their business correctly. Carry out informed decisions as and when required to steer clear of any wrongful trading issues.
We list below examples of potential wrongful trading:
- Knowingly accumulate debts at the creditors’ detriment.
- Directors committing to credit agreements knowing they have no ability or intent to pay them;
- HMRC debt increases while paying trade creditors, dividends or preferential payments;
- Allowing deposits from customers to be taken and used to pay debts, rather than supply the goods the deposit was taken for;
- Company directors pay themselves unreasonable salaries when the business is in arrears with HMRC and other debts;
- The company continues receiving goods when unable to pay or without the 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.
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 then details wrongful trading, being when a company director (known as an officer of the company) then permits the company to trade in the knowledge of
• ‘the company retains no evidence attempting to steer away from insolvency;
• ‘and did not ensure they took every action to minimise then any trading losses to the detriment of 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.
For further reading, please view ‘Companies Act 2006 explained‘.
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 creditors of the company. However, clear 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.
- Omitting HMRC payments deliberately;
- Falsification of company records;
- Failure to maintain proper books and records;
- Supporting company cash flow through deposits, having no ability to supply items either with or without intent;
- Repaying directors loans in preference to others;
- Loans by family or friends repaid when others are not;
- Failing to pay VAT owed;
- A director paying their salary in the knowledge that employees have remained unpaid, and or payment to HMRC remains unpaid;
- Obtaining goods by deceit, knowing payment will not be made;
- Failing to pay VAT owed;
- Repaying personal bank guarantees before company creditors;
- Trading fraudulently;
- Trading claiming VAT when unregistered.
The consequences for directors who trade in a wrongful way are severe. Please read: 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 not use the same trading name, as they may face action against them. 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 contact 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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