Seven Key Differences Between Wrongful Trading And The Creditor Duty
The following are seven points of difference between Wrongful Trading and the Creditor Duty.
When a company is in financial trouble it has to consider its creditors. If it fails to do so properly then there can be consequences for the Directors and even other parties.
These seven points of difference between Wrongful Trading and the Creditor Duty were highlighted by Lord Reed in the decision in the matter of BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25 when that case was heard by the Supreme Court.
Point In Time
The point in time at which the relevant duties arise differ where Wrongful Trading and the Creditor Duty apply. Director’s duties sometimes referred to as fiduciary duties, apply at all times, but there is a change if they are modified by the Creditor Duty when the company is bordering on insolvency or an insolvent Liquidation or Administration is probable. It, therefore, applies in that modified way before the time when Wrongful Trading under Section 214 of the Insolvency Act 1986 might become relevant, ie when a reasonably diligent and competent director would know that there was no reasonable prospect of avoiding insolvency proceedings.
Director Knowledge
Wrongful Trading applies only where the Directors know or ought to know that there is no reasonable prospect of avoiding insolvent Liquidation or Administration. The directors do not require such knowledge in order for the Creditor Duty to apply.
Difference In The Duties
The duties in respect of Wrongful Trading and the Creditor Duty are not the same. The circumstances where Wrongful Trading applies are more restrictive but it imposes a more onerous duty on a Director. The difference is that Director’s duties when the Creditor Duty is triggered are to act in the best interests of the company generally which can usually be judged subjectively whereas Wrongful Trading encompasses a duty to take reasonable care to minimise the potential loss to the company’s creditors, is judged objectively.
Remedies Available
The remedies for a breach of the Creditor Duty are different: on the one hand, the wide range of remedies available for the breach of the Creditor Duty, whereas in the case of Wrongful Trading a liability to make a contribution to the company’s assets is at the discretion of the Court.
Circumstances Of The Action
Legal proceedings due to Wrongful Trading can only be brought under Section 214 of the Insolvency Act 1986 in the event that the company is wound up. There is no such restriction on the bringing of proceedings for breach of fiduciary duty.
Who Can Bring The Legal Action
The range of persons who can bring proceedings for a breach of fiduciary duty extends beyond the Liquidator. Breach of the Creditor Duty may give rise to a remedy at the instance of the company itself, or its assignee, or a shareholder, or a creditor or contributory making an application under Section 212 of the Insolvency Act 1986, or a Liquidator or Administrator.
Person Against Whom An Action Could Be Brought
Proceedings under Wrongful Trading can only be brought against a Director whereas the legal action that can be brought for a breach of fiduciary duty is potentially available against a wider range of persons, including knowing recipients of payments made in breach of the duty.
