Directors Duties in Insolvency
Wrongful trading
In these uncertain times, a director of a limited company needs to take extra care, especially when the company becomes unable to avoid liquidation.
When a company is insolvent*, the director’s primary duty of care is to the creditors of the company, not themselves or the shareholders.
If the director continues to trade and increases the indebtedness of the company (s)he is at risk of WRONGFUL TRADING and may become personally liable for the debts of the company.
When a company enters liquidation the insolvency practitioner has a duty to investigate the affairs of the company and report to the Insolvency Service on the director’s conduct.
One aspect of the liquidator’s investigation will be to look for any instances of wrongful trading. Has the director continued to trade the business past the point when (s)he “knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation” and has (s)he taken “every step with a view to minimising the potential loss to the company’s creditors”?
It is not just what the director actually knew, but what (s)he ought to have known, had they been a “reasonably diligent person”.
It is imperative that in difficult trading conditions directors remain vigilant and avoid potential problems of wrongful trading. The director risks personal liability for the losses incurred during the wrongful trading period and possible disqualification from acting as a director in the future.
It is therefore vital for directors to take advice earlier rather than later to ascertain if they could be pursued for a claim for wrongful trading in the event of insolvency.
Bretts BR offers initial consultation in confidence, without charge
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*The definition of Insolvent
S.123 of the Insolvency Act 1986
A company is deemed unable to pay its debts—
(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or
(b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or
(c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or
(d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.