What is wrongful trading? A timely reminder if you’re reopening your business
The directors and owners of the business will have been working 24/7 to get everything compliant and ready to welcome people in a safe and secure setting.
They will have been bringing back staff or hiring new workers to meet anticipated demand, ordering in supplies and getting everything ready for what they hope will be an excellent but belated start to the trading year.
The issue of wrongful trading seems a million miles away at the moment but it’s worth taking five minutes to catch up on what it means for a business and directors who do fall foul of the law including what they can do now to avoid it.
What is wrongful trading?
This is where directors knowingly allow the business to remain open and keep trading while it’s insolvent with little or no prospect of it being able to repay creditors. It can also be known as trading while insolvent.
Before the year of lockdowns, there were quite severe penalties for directors of companies that were guilty of wrongful trading. These included being made personally liable for debts the business incurred during the period as well as being disqualified as a director for a period.
This was under normal business circumstances which the past 12 months have been anything but. As a result, the government introduced some changes to the rules around wrongful trading as part of the Corporate Insolvency and Governance Bill 2020.
One of these was the suspension of wrongful trading rules. The suspension has been extended and will currently end on June 30.
The idea being that with the massive uncertainty faced by businesses, directors could find themselves technically being guilty of wrongful trading while doing their best to keep their company active.
Other currently suspended rules include the ability of creditors to issue statutory demands and winding up petitions, all designed to give directors the maximum flexibility to make sure they had companies that could reopen when allowed.
The easiest way to tell if a company could be considered to be wrongfully trading is if they don’t pay their debts as they fall due or if their liabilities exceed their total assets.
Wrongful trading is a civil offence and could be defended depending on the circumstances but fraudulent trading is different and is an actual criminal offence.
To be guilty of fraudulent trading, it has to be proved that directors willingly and knowingly carried on business affairs with no intent to pay their debts. Examples can include taking customers money while preparing to put the company into liquidation and not delivering goods or services that have already been paid for.
Any insolvency practitioner investigating the actions of directors would be legally obliged to report any evidence of fraudulent trading to the authorities.
When the rule changes were announced, Chris Horner, Insolvency Director with Business Rescue Expert said: “It’s important for directors to understand that they haven’t been handed a “get out of jail free” card.
“It’s good news that companies in financial difficulty are being offered support but if the underlying causes of their issues dont change then they will still need professional help sooner rather than later.”
There are some practical steps businesses can take if they fear they could be in danger of wrongful trading.
These include not taking delivery of goods they know or suspect they won’t be able to pay for; not dispose of any assets without specialist advice and don’t make any preferential payments to creditors at this time – especially friends or family.
The best and easiest step they could take is to contact us and get specific advice as soon as possible.
We will be able to advise them of their options depending on their situation and how to make changes that could alleviate their concerns.
Alternatively, if the company has reached the end of its life cycle then directors should look at their options at closing down including methods of voluntary liquidation
No matter what they ultimately decide, getting advice and acting on it while they still have agency, is always the best, first choice.