Overview Of What Is ‘Every Step’ Wrongful Trading Defence?

The every step defence to Wrongful Trading is a reference to the statutory defence set out in Section 214 of the Insolvency Act 1986.

Section 214 of the Insolvency Act 1986 is the well-known provision in the Insolvency Act 1986 known as Wrongful Trading.

What Is Wrongful Trading?

In short wrongful trading is a provision that arises when a Company goes into Liquidation and when as some point prior to that date a Director knew or ought to have known that the Company would not avoid insolvent Liquidation.

Consequence of Wrongful Trading

If a Director has engaged in Wrongful Trading then they can be ordered by the Court to contribute to the Company’s assets in respect of the losses incurred during a period of Wrongful Trading. The contribution that a Director may be ordered to make typically would involve the increase in the overall loss suffered by creditors during such a period of Wrongful Trading.

Statutory Defence To Wrongful Trading

Section 214(3) of the Insolvency Act 1986 has a statutory defence available for a Director in respect of Wrongful Trading.

What it says is that the Court will not make an order for a Director to contribute to the Company’s assets even if they have traded whilst insolvent and even if they have caused creditors to suffer an increased loss; provided they:

took every step with a view to minimising the potential loss to the company’s creditors as … he ought to have taken.

What Steps Are Required?

It would appear that there are not a predetermined series of steps that you tick off to say to a Liquidator who might suggest that you are guilty of Wrongful Trading or that you have a problem, that you can refer to.

There will likely be certain generic similar points that crop up time and again that it will be useful for a Director to be able to show but it is likely that will only go so far. In Brooks and another v Armstrong and another [2015] EWHC 2289 (Ch) Judge Jones referred to the following considerations as ‘steps’ at [259]:

both generally and when considering specific financial decisions assuming the business remains sustainable:

Ensuring accounting records are kept up to date with a budget and cash flow forecast;

preparing a business review and a plan dealing with future trading including steps that can be taken (for example cost cutting) to minimise loss;

keeping creditors informed and reaching agreements to deal with debt and supply where possible;

regularly monitoring the trading and financial position together with the business plan both informally and at board meetings; asking if loss is being minimised;

ensuring adequate capitalisation; obtaining professional advice (legal and financial); and considering alternative insolvency remedies.“

However, the ‘every step’ statutory defence will refer to different facts in each case that a Director has to face and therefore the ‘steps’ required will be different as a result in each and every case.

Oliver Elliot Comment

It appears that the nature of the defence is one in which a Director has to show objectively that he or she acted in good faith and if it could be shown that was not the case because a ‘step’ was to expose such a position then they may face an uphill struggle to show that they did indeed take ‘every step’ to minimise potential loss to creditors.

What Next?

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Disclaimer: What Is The Every Step Defence To Wrongful Trading?

This page What Is The Every Step Defence To Wrongful Trading? is not legal advice and should not be relied upon as such. This article What Is The Every Step Defence To Wrongful Trading? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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