Understanding Wrongful Trading: A Legal Concept Explained

Published: 11/03/2024 By Hannah Duncan

In the world of business, various legal terms and concepts govern the conduct of business owners. One such term is "wrongful trading." This legal concept carries substantial implications for company directors and highlights the responsibility they bear in times of financial distress.

What is Wrongful Trading?
Wrongful trading occurs when company directors continue to operate a business despite knowing, or ought to have known, that there is no reasonable prospect of avoiding insolvency. In simpler terms, it's the continuation of trading by directors when they are aware that the company cannot pay its debts as they become due. This conduct can exacerbate losses to creditors and worsen the financial position of the company.

Legal Implications
The consequences of wrongful trading can be severe. Directors found guilty of wrongful trading may be held personally liable for the company's debts incurred during the period of wrongful trading. Additionally, they might face disqualification from acting as company directors for a specified period.

Determining Wrongful Trading
Proving wrongful trading typically involves assessing the actions and decisions of directors in the context of the company's financial circumstances. Factors such as continued trading losses, inability to pay debts, and neglecting professional advice can contribute to establishing wrongful trading. Importantly, the focus is on the directors' knowledge and conduct, emphasising their obligation to exercise due diligence and act prudently in managing the company's affairs.

Importance of Awareness
Understanding wrongful trading is crucial for directors, shareholders, creditors, and other stakeholders. Directors must remain vigilant about their company's financial health and take appropriate measures if insolvency becomes imminent. Seeking professional advice, implementing restructuring plans, or considering insolvency proceedings are among the actions that may be necessary to mitigate the risk of wrongful trading and protect the interests of all parties involved.

How to avoid Wrongful Trading
By understanding their duties and obligations, seeking professional advice when needed, and taking prompt action in cases of financial distress, directors can navigate the risks associated with wrongful trading. Ultimately, responsible conduct, transparency and sensible decision making are key to avoiding the pitfalls of wrongful trading and ensuring the long-term viability of businesses.

If you are a director and are in doubt about any of the points we have raised please get in touch so we can put your mind at rest. Our qualified licensed insolvency practitioners are at the end of the phone ready to have a chat at no cost to yourself.