“What is Wrongful Trading? Am I Guilty of Wrongful Trading if the Company is Insolvent?”
We are often asked what this means because directors have talked to their accountants, advisors, insolvency practitioners or a clever man in the pub. They may have said “be careful if your company is insolvent then you will be guilty of “wrongful trading”! This is nonsense!
The simple explanation is this: if you act badly when you know the company is insolvent, then you may have some personal liability if the company is liquidated.
Worried? Well read this guide in a bit more detail to learn more.
First of all is the company insolvent? To establish the answer to this there are three tests:
- Can the company pay its creditors as and when the debts fall due? This is called the cashflow test.
- Is there more money owed to creditors than assets? This is called the insolvent balance sheet test.
- Is there an outstanding County Court Judgment over £750?
If any of the three tests above are met, then your company is probably insolvent and you must act properly and act in the best interests of the creditors (all of them being treated in the same way).
If the directors do not act in the creditors’ interests and they act “wrongfully”, then they can be made personally liable for the company’s debts from the time they knew the company was insolvent. So if you are in a hole, stop digging and get help!
If the company is insolvent and the directors know it is, then other tests for wrongful trading actions include:
- Not filing the company’s Annual Returns at Companies House.
- Not filing annual or audited accounts at Companies House.
- Not operating the PAYE scheme correctly; in other words failing to pay PAYE and NIC when due.
- Not operating the VAT scheme correctly, as above.
- Taking excessive salaries when the company cannot afford them.
- Taking credit from suppliers where there was no “reasonable prospect” of paying the creditor on time.
- Willfully piling up debt and knowing there was no way out of the problems.
Formal insolvency procedures
Wrongful trading actions can only be commenced in a formal insolvency. What is a formal insolvency event?
For example: Creditors Voluntary Liquidation, Administration, Administrative Receivership or Compulsory Liquidation. It does not apply in Company Voluntary Arrangements, Trading Out, Refinancing.
So wrongful trading IS a risk if you act badly without taking care. Obviously, the best way is to act carefully, take advice from experts like us and make sure all decisions are carefully written down (minuted). If you do act properly there is minimal risk of you acting wrongfully.
No one can be accused of wrongful trading when they simply made mistakes. It’s when you cannot provide evidence that you acted in good faith, when making the decisions that then turned out to be wrong, that problems arise
So always write notes or minutes when making big decisions, keep them handy and talk to us if you need guidance.
If you want to know more please call or email us for further details. Alternatively visit www.companyrescue.co.uk for much more detailed information on all things about insolvency.