Wrongful Trading?

 

Wrongful Trading? If you are trading whilst insolvent and have no reasonable prospect of avoiding insolvent liquidation then you are involved in conduct known as Wrongful Trading by virtue of Section 214 of the Insolvency Act 1986. However, even if you are involved in Wrongful Trading you may well be able to defend yourself to avoid the risk of personal liability that could flow from the losses suffered as a result of Wrongful Trading, provided you can demonstrate that you took every step with a view to minimising the potential loss to the company’s creditors.

 

The Oliver Elliot Wrongful Trading Toolkit

 

The Oliver Elliot Wrongful Trading Toolkit is designed to provide you with some information so that you can consider if you are at real as opposed to remote risk of Wrong Trading. It however cannot cover every fact or eventuality and is therefore provided free of charge but for information purposes only.

 

Section 214 of the Insolvency Act 1986

(1)Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.

(2)This subsection applies in relation to a person if—

(a)the company has gone into insolvent liquidation,

(b)at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and

(c)that person was a director of the company at that time;

but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.

(3)The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company’s creditors as on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)] ) he ought to have taken.

(4)For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both—

(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b)the general knowledge, skill and experience that that director has.

(5)The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.

(6)For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(6A)For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration.

(7)In this section “director” includes a shadow director.

(8)This section is without prejudice to section 213.