Directors of companies facing administration or insolvent liquidation should ensure they treat creditors equally and take professional advice, or risk being unable to defend a charge of ‘wrongful trading’. As a barrister specialising in white-collar crime, I have the experience and expertise required to ensure you receive robust advice and legal representation.
Wrongful Trading Lawyer
The courts insist that professional advice is obtained as soon as possible in cases of suspected wrongful trading. Directors can instruct me directly, without the need to also engage a Solicitor, should they find themselves accused of such claims. In addition, I can advise directors of a company facing financial difficulties on how they can ensure they comply with regulations and avoid any accusation of potential wrongful trading prior to the organisation falling into administration.
What is Wrongful Trading?
Wrongful trading is deemed to have occurred if, at some time beforehand, a director knew (or ‘ought reasonably to have concluded’) that there was no reasonable prospect of avoiding the administration or insolvent winding up but did not take ‘every step’ possible to minimise the potential loss to the company’s creditors. In deciding whether a director took every step to minimise loss to creditors, the court assumes the director knew there was no reasonable prospect of the company avoiding the administration or insolvent liquidation, even if in fact they did not.
The aim of wrongful trading laws is to make directors of companies in financial trouble (who might otherwise try to trade out of trouble) stop and think carefully about whether they are being over-optimistic about the company’s prospects.
What is the test used by the courts to decide whether wrongful trading has been committed?
When judging whether the director knew or ought to have concluded that there was no prospect of the organisation avoiding liquidation, and whether they took all steps a reasonably diligent person would take to minimise potential loss to the company’s creditors, the court considers two questions:
- The director’s functions: the court asks what a reasonably diligent person with the general knowledge, skill and experience required of someone exercising those functions would have concluded and the steps they would have taken. This is an objective test so, for instance, a finance director will be expected to reach the minimum threshold of competence required for finance directors
- The general knowledge, skill and experience of the director: the court considers this a subjective test, under which a director with specialist skills or experience is expected to apply them. They are therefore subject to a higher standard than a director without those skills or experience
In a recent case, a company liquidator alleged directors had been guilty of ‘wrongful trading’. One issue the court had to consider was whether the directors could rely on the defence that they had taken ‘every step’ to minimise loss to creditors. The court said this was a ‘high hurdle for directors to surmount’.
The directors had carried on trading hoping that the usual summer upturn in their industry, the completion of various projects, and a successful outcome to negotiations with a potential investor, would improve the situation. However, the court said this meant some creditors – particularly the bank – had been paid while the company continued to trade, whereas others had not. The court found that, by definition, paying off some creditors and not others could not amount to taking every step to minimise the loss to creditors. The directors could not, therefore, rely on the defence in this case.
The court helpfully clarified that directors taking a reasonable salary for work carried out while the company was in difficulties did not preclude them from relying on the ‘every steps’ defence.
The court made repeated references to the importance of directors taking professional advice at the right time, and updating it if circumstances changed, in order to be able to rely on the defence.
I have the skills and business acumen necessary to ensure the above situation does not happen to you. I understand that a director’s first instinct is to save their company and try every which way to trade out of trouble. By providing clear, emotion-free advice, I can ensure you obtain the insights required to protect your best interests and carry out your duties as a director with integrity.
Indications of Wrongful Trading
The following are some of the warning signs that directors may be wrongfully trading:
- Claims being issued and judgements in default
- Poor credit rating
- Dishonoured cheques
- Trading in breach of bank overdraft
- Unmet letters of demand
- Directors looking for time to pay arrangements with third parties
Should you be accused of wrongful trading, I will meticulously examine your actions and build a strong, persuasive defence, based on ensuring you succeed in both the objective and subjective tests the court will use to determine liability in relation to wrongful trading. I understand your professional reputation and potentially your freedom is at stake and can assure you I will put in the hard work required to provide a robust defence and put an end to the matter as quickly as possible.