Wrongful trading warning for company directors

Directors of limited companies are being warned that their personal assets could still be at risk if their business folds leaving a stream of creditors.

Kevin Sullivan, solicitor and partner at the Essex law firm Birkett Long, says if it can be proven a director ignored the warning signs his firm was about to fold and carried on trading whilst amassing debt they could be penalised out of their own pocket.

“It’s known as wrongful trading,” said Kevin, who specialises in insolvency law and represents company directors facing such claims as well as disqualification proceedings.

Kevin said: “When a company goes under, the directors may be at risk of the liquidator bringing a claim against them under section 214 of the Insolvency Act 1986 alleging they have engaged in ‘wrongful trading’.

“If found liable, they may be ordered to make a contribution to the company’s assets.

“What directors fail to realise is there is a lower burden of proof needed to prove wrongful trading than there is fraudulent trading, which theoretically makes it easier for the liquidator to gain an order for wrongful trading. 

“That said, it is still a difficult claim to bring but that won’t eliminate the risk of allegations being made which need investigating and rebutting.”

He says it’s a tough position for directors to be in and there is evidence that some start insolvency proceedings before they are perhaps necessary.

If your firm is in financial crisis his advice is this:

Hold regular board meetings and report the commercial decisions of directors in full in the company’s minutes.

Ensure you have up-to-date information on your financial affairs – don’t wait for telltale signs such as a demand from a creditor, a winding up petition or notice from the bank of an interest payment. And...

Carefully monitor your lender’s financial compliance covenants.

Kevin adds: “As ever, seeking early legal advice is always a director’s best option. Getting things wrong can be disastrous.”