It’s crucial as a director of a company that you operate within the law. The best way to do this is to be as informed as possible about all the potential pitfalls that you may come across.

Wrongful and Fraudulent trading are distinct violations with differing consequences. Focus insolvency can help you avoid committing either offence or assist you if you believe you may have already done so.

Directors often only become aware of what is considered in law to be wrongful trading - when it's already be committed.

Wrongful Trading Explained

Wrongful trading concerns the period of time when a director is aware, or ought to be aware, that their company is insolvent. When it becomes apparent that their company is set for liquidation directors must cease the company’s trading and work to maximise the interests of their creditors.

If directors take actions to maximise their own interests, or that of anyone else’s, over those of the Company’s creditors this constitutes Wrongful trading, and they can face significant punishment. These include disqualification from directorship for up to 15 years, fines and sometimes imprisonment.

It is imperative that you as a director act vigilantly and diligently if you believe your company may be on the verge of insolvency or presently insolvent.

Wrongful trading will be investigated by an Insolvency Practitioner during insolvency proceedings. They will determine if an offence has been committed and report any missteps to the relevant conduct authority.

Any of the following can be considered Wrongful Trading:

  • Failure to file annual returns and audited accounts to the Companies House.
  • Failures surrounding PAYE and NIC including failure to pay and the accumulation of arrears.
  • Continuing to trade while insolvent or when it should be obvious to a director that the company is insolvent.
  • Intentionally accruing debt.
  • Collecting excessive director’s salaries that the company cannot afford.
  • Not properly managing the VAT system.
  • Taking payment from customers who you know are not likely to receive their product or service.

The accurate keeping of records is extremely important in these circumstances. They can help you demonstrate the validity of your actions in insolvency.

A rule for avoiding Wrongful Trading is to always act in the best interest of your creditors. Actions that oppose the interests of your creditors are likely to be considered Wrongful Trading and should be avoided.

What to do if you believe you are guilty of Wrongful Trading

If you believe you may be guilty of Wrongful Trading it is important you seek professional help as soon as possible. We offer free consultations and advice to help guide you through the best course of action.

The moment you realise your company is insolvent you must cease trading as soon as is practically possible. Accurate and detailed record-keeping is also crucial for the justification of your decision making.

You can only be found guilty of Wrongful Trading if your company is liquidated. Up until that point, you can explore other options to avoid this happening. There are a number of alternative options that may be available to you:

If appropriate these can secure the survival of your company and avoid liquidation. In these circumstances, you cannot be convicted of Wrongful Trading.

It is crucial to note, however, that these are not a means to get out of a Wrongful Trading charge. They are only to be implemented when appropriate and they may not be the right choice for your company. You may not be able to avoid liquidation and so must always act to maximise your creditor’s interests.

We can assist you in defining the best path forward for you and your business.

Suspension of liability for Wrongful Trading

The 2020/21 pandemic has seen some of the rules surrounding Wrongful Trading relaxed. Unusual trading conditions have meant, for the duration of the pandemic, directors have temporarily been given greater leeway with actions that may have previously been considered Wrongful Trading.

That is to say, companies that were previously performing well but that have been affected by the pandemic have been allowed to take on loans even though their short-term balance sheets might indicate that they are insolvent. This is in recognition that their short-term balance sheets do not reflect the true health of their company, only the present economic climate.

This, however, must not be construed as a get out of jail free card.

Companies that were failing prior to the pandemic, that has used the pandemic support schemes to stay afloat, may still see their directors found guilty of wrongful trading when they enter liquidation proceedings.

When applying for Covid support loans directors had to provide a true reflection of the company’s financial situation in order to be approved. If you provided false information in support of your loan application, that can constitute Wrongful Trading.

So there has been an easing of Wrongful Trading rules but not elimination.

The consequences of Wrongful Trading can be significant and extremely damaging to you and your company. If you believe you may have committed Wrongful Trading or would like to avoid doing so during your company’s insolvency, contact Focus insolvency for a free consultation.