What Is The Every Step Defence To Wrongful Trading?

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.

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.