Wrongful trading

Introduction

Wrongful trading occurs where on a winding-up it appears to the court that the company has gone into insolvent liquidation and, before the start of winding up, the directors knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

Legal intention

The provision of 'wrongful trading' contained in the Insolvency Act 1986 is designed to remove one of the difficult obstacles to the establishment of being party to fraudulent trading, namely proving dishonesty. It applies only to directors and shadow directors.

Directors are expected to reach those conclusions and take such steps as a reasonably diligent person would take. The legislation also expects such a director to:

• have the general knowledge, skill and experience which may reasonably be expected of a person carrying out the same functions as were carried out by that director (i.e. this is an objective test)
• use the general knowledge, skill and experience he himself has (i.e. this is a subjective test).

When considering the director's functions, the court will have regard not only to those functions he carried out but also to those entrusted to him. This means that the director could be made liable for those actions he should have carried out but failed to.

Consequences

• a liquidator may apply to the court for an order that the director should make such contribution to the company's assets as the court thinks fit, thereby increasing the assets available for distribution to the creditors
• They may be disqualified for 15 years under CDDA86.

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Tags:	Insolvency Act 1986