Wrongful trading is a legal term that refers to the situation where the directors of a company continue to trade when they knew or ought to have known that the company was insolvent, and there was no reasonable prospect of avoiding liquidation. In such cases, directors can be held personally liable for the debts incurred during this period of wrongful trading. The purpose of wrongful trading provisions in corporate law is to prevent directors from taking undue risks with company funds once insolvency becomes inevitable, thereby protecting creditors’ interests. If a director is found guilty of wrongful trading, they may be required to contribute to the company’s assets and can face disqualification from acting as a director in the future.
Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 of the Insolvency Act 1986.
Wrongful trading is when a company trades during a period is which it has no reasonable prospect of avoiding insolvent liquidation.
The liquidator of a company may petition the courts for an order instructing a director of a company that has gone into insolvent liquidation to make a contribution to the company’s assets. A court may order any contribution to be made that it considers proper if it is reasonable to assume that the company director knew, or ought to have known, of the company’s situation.
In regards to wrongful trading, no intention to defraud needs to be shown. A director would be judged liable if a reasonably diligent person undertaking the same function in the company would have realised the situation.
Wrongful trading is a legal concept that applies in insolvency law. It refers to a situation where directors of a company continue to trade and incur debts when they know or should have known that there is no reasonable prospect of avoiding insolvent liquidation.
In essence, wrongful trading occurs when directors allow a company to continue operating and accumulating debt even though they are aware, or should be aware based on the company’s financial situation, that there is no realistic chance of recovering from insolvency. This can lead to personal liability for the directors, where they may be required to contribute to the company’s assets to help repay creditors if the company enters formal insolvency proceedings.
The aim of wrongful trading provisions is to discourage directors from acting irresponsibly and to promote early recognition of a company’s financial difficulties, potentially leading to more timely action such as seeking professional advice or initiating insolvency proceedings if necessary.
Wrongful trading refers to a situation where the directors of a company continue to operate the business despite knowing, or ought to have known, that there is no reasonable prospect of avoiding insolvent liquidation, and creditors are likely to suffer further losses as a result.
Directors found liable for wrongful trading may be personally liable for the company’s debts incurred during the period of wrongful trading. Additionally, they may face disqualification from acting as directors for a specified period.
Wrongful trading involves a failure to take appropriate action when a company is insolvent or on the brink of insolvency, whereas fraudulent trading involves intentionally deceiving creditors or engaging in dishonest conduct with the intent to defraud.
Some of the factors considered in determining wrongful trading may include the directors’ knowledge or awareness of the company’s financial situation, their actions in continuing to trade, and whether they took appropriate steps to minimise losses to creditors.
Directors should closely monitor the company’s financial position, seek professional advice if there are concerns about solvency, and take appropriate action, such as seeking insolvency advice or placing the company into administration or liquidation if necessary.
Yes, directors can be held personally liable for wrongful trading if it is determined that they failed to take appropriate action to mitigate losses to creditors and continued to trade despite knowing, or should have known, that insolvency was unavoidable.
Creditors can prove wrongful trading by demonstrating that the directors continued to trade the company’s business at a time when it was insolvent or on the brink of insolvency, and that this resulted in further losses to creditors.
Directors may defend against allegations of wrongful trading by demonstrating that they acted reasonably and diligently in managing the company’s affairs, sought appropriate professional advice, and took appropriate steps to minimise losses to creditors.
Yes, a company, acting through its liquidator or administrator, can pursue a claim of wrongful trading against its directors if it is determined that they breached their duties and caused losses to the company and its creditors.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 28th April, 2024.
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