There are times when a director can incur personal liability for a Company’s debts as the result of “wrongful trading”. One key to avoiding this problem is to seek proper professional advice at the earliest opportunity.
Wrongful trading can arise if your company goes into insolvent liquidation, and at some time before the commencement of the winding up of the company, you knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation. This could lead the court to order the directors to make a contribution to the company’s assets as it thinks proper.
The only defence to wrongful trading is that after you first knew, or ought to have known, of the company’s inevitable insolvency, you took every step that could have been taken to minimise the potential loss to the company’s creditors. Therefore it is essential that you take the right steps and document these as having been taken when your company is on the brink of insolvency.
Seek early professional advice
Hold regular board meetings to monitor the company’s position and ensure all directors are aware of the company’s financial status. Circulate minutes to confirm the matters discussed
Consider all possible sources of funding and document the board’s attitude and efforts to obtain it
Produce a plan of action to combat the financial problems, and a timetable to ensure that it is clear to the board the point at which there is no reasonable prospect of the company avoiding insolvent liquidation
Consider the company’s position from the viewpoint of a ‘reasonable director’. No credit is given for over-optimistic directors who continue to trade beyond the point at which they should have realised there is no reasonable prospect of the company avoiding insolvent liquidation
Let the company incur any further substantial liabilities, unless absolutely necessary, until additional funding has been secured
Ignore signs of financial difficulties, such as pressure from creditors, late filing of accounts, judgments against the company, or wait for a winding-up petition, before taking action
Continue to trade in the hope that the company’s financial position will improve once the company has no reasonable prospect of avoiding insolvent liquidation. Ask yourself whether you are acting in the manner of a ‘reasonable director’
Delay in discussing the challenges the company faces. As soon as you become aware that there is no reasonable prospect of the company avoiding insolvent liquidation, you have a duty to raise the problem with the other directors and professionals and to take appropriate action. If you conclude that the company cannot continue to trade you must implement one of the insolvency procedures, such as Administration
Resign; you have a duty to take every step to minimise potential loss to creditors. It may be necessary to place the company into Administration to achieve this