Being a company director can bring wide-ranging rewards. It also brings lots of legal responsibilities which still apply even if you’re not active in the business, are following instructions from more senior partners, or are not formally appointed as a director but carrying out a director’s responsibilities.
At all times, you will be expected to demonstrate due diligence and full compliance with the law. You will also be expected to uphold shareholders’ best interests whilst the company is active and trading.
But once it is facing insolvency, you are required to focus on the interests of your creditors. So, what are your director’s duties when insolvency is staring you in the face?
Don’t trade wrongfully
In simple terms, wrongful trading is trading that is rash or irresponsible and runs counters to creditors’ interests. If you are judged to have traded wrongfully, then creditors can pursue you for any increased debt your careless behaviour has brought about.
This is not criminal behaviour but a civil wrong, as stated by Section 14 of the Insolvency Act 1986. It is important to distinguish wrongful trading from fraudulent trading, which is a criminal offence under Section 993 of the Companies Act 2006.
Your trading moves from wrongful to fraudulent when you deliberately set out to defraud or frustrate your creditors, and if found guilty of the offence you could face up to ten years in prison plus unlimited personal liability for your actions.
It is important to note that continuing to trade whilst insolvent usually constitutes wrongful trading, as directors can be in ignorance of their real financial position.
However, if you know you are insolvent and continue to trade to deceive creditors, you can expect to be charged with fraudulent trading.
What are the criteria and penalties for wrongful trading?
Section 214 specifies that wrongful trading occurs when a director continues to trade whilst he or she “knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation” and “did not take every step with a view to minimising the potential loss to the company’s creditors”.
Judges have wide-ranging discretion in wrongful trading cases, including awarding substantial compensation to creditors. Where “blameworthy or dishonest” wrongful trading is suspected, the person concerned can be disqualified as a company director for anything up to 15 years.
In the worst of cases, criminal prosecution can even be initiated, even though wrongful trading is generally a civil offence.
To discover what we can do, contact one of our expert advisors. Alternatively, if you’re facing immediate insolvency, we have extensive expertise in business rescue and restructuring.