Wrongful trading, as a category of claims pursuable by an Insolvency Practitioner, is set out at section 214 of the Insolvency Act 1986. Essentially, the IP will be looking to see if the directors of a company allowed it to trade for too long at the expense of its creditors.
The liquidator will ask whether the director either knew or ought to have concluded that there was no prospect of the company avoiding insolvent liquidation.
If successful, the court has a wide discretion to declare that the person facing those proceedings has to make such contribution as the Court sees fit. In plain English this means the payment of money to the liquidator.
The director ought to try to show that every step was taken to avoid losses to creditors according to the ‘skill, knowledge and experience’ of the director concerned. The matter may be referred to the Insolvency Service criminal enforcement team if criminal behaviour is suspected.
The following are some of the warning signs that directors may be wrongfully trading:
- Claims being issued and judgements in default
- Poor credit rating
- Dishonoured cheques
- Trading in breach of bank overdraft
- Unmet letters of demand
- Directors looking for time to pay arrangements with third parties
Where it appears that the company was run with the intent to defraud creditors, the liquidator can ask the court to declare that the person being pursued is guilty of fraudulent trading.
A far more serious situation uncovered by a liquidator when investigating the trading of a company is fraudulent trading.
Need help? Olliers are specialist wrongful and fraudulent trading lawyers (London & Manchester)