In any set of insolvency proceedings, company directors are required to prove that they haven’t participated in or allowed wrongful trading. Wrongful trading occurs when directors allow their company to continue trading despite knowing that it would be impossible to minimise losses to its creditors. The Insolvency Act 1986 sets out that this is a statutory offence and that anyone occupying a position of director, no matter what job title they have, can be convicted of wrongful trading. This includes de facto and shadow directors. It is important to realise that this offence is personal to the director, a Director cannot hide behind a company and could, if found guilty, face prison sentences, disqualification proceedings and hefty financial penalties.
While there are subjective and objective tests related to the amount of knowledge a reasonable director should have, related to the size and operations of the business and their function, a liquidator will usually argue that there are a number of factors that any responsible director should know about. These include:
- The company being insolvent on its balance sheets
- The company only paying creditors once they have received statutory demands or have had proceedings issued against them
- Pressure from creditors
- Late filing of accounts.
It is arguable that a responsible director should know and understand the workings of their business as they involve day to day company operations. As a result, if these have occurred, a liquidator could use the evidence to hold any director to account.
The best way of defending against a case of wrongful trading is to be able to prove that, after discovering that the company was insolvent, the directors took every possible step to minimise the losses of the company’s creditors. Examples of this include:
- Seeking and taking professional legal and accountancy advice
- Reducing and minimising the purchase of goods on credit
- Rigorously chasing up debts from clients and customers
- Regularly reviewing company accounts and financial reports
- Keeping accurate records of their own activities
- Ensuring that the financial records that exist are fit for purpose
- Raising financial concerns with the board.
If you fear that your company may be facing insolvency proceedings or that you could be charged with wrongful trading, the team at Jarmans Solicitors are available to advise and represent you. Contact us to book an appointment for a meeting.