Understanding what is deemed wrongful trading by company directors
Wrongful trading is when a company director allows their company to continue trading after they knew, or ought to have known, that the company was insolvent (unable to pay its debts) and that there was no reasonable prospect of avoiding liquidation. Essentially, wrongful trading is when you continue to trade and accumulate debt when there’s no realistic chance of turning the company around.
How wrongful trading affects creditors
Wrongful trading can have a hugely negative impact on the existing creditors of an insolvent as they risk suffering more financial losses the longer the company continues to trade wrongfully.
When an insolvent company continues to engage in wrongful trading, its losses and debts typically grow. In some cases, directors may also look to sell the assets of the company – and if this is not done in the correct way, with assets being sold at true market value – this also constitutes wrongful trading.
With fewer assets and more debts, this means outstanding creditors stand to recover less of the money they are owed should the company enter into formal insolvency proceedings, such as liquidation under the guidance of a licensed insolvency practitioner.
How wrongful trading affects directors
As the director of a limited company in Scotland, you have a number of legal responsibilities and duties. One of these is to prioritise the interests of your creditors above those of the company’s directors and shareholders once it becomes clear that the company is insolvent.
Failure to adhere to these legal requirements could see you being held personally liable for some or all of the debts of the company. Following an insolvent company’s entry into liquidation, the appointed insolvency practitioner is duty-bound to conduct an investigation into the actions of the company’s directors during the time leading up to the company becoming insolvent. Any instances of wrongful trading will form part of a director’s conduct report.
In short, directors are obliged to take all steps necessary to shield outstanding creditors from further losses once the company becomes insolvent.
How to avoid wrongful trading as a company director in Scotland
The very best way to avoid wrongful trading as a director is to seek the advice of a licensed insolvency practitioner once you know your company is insolvent or is on the road to insolvency.
By contacting an insolvency practitioner, you are demonstrating your desire to place the interests of your creditors above those of yourself and your fellow directors and therefore adhere to your legal duties as the director of an insolvent limited company.
An insolvency practitioner will be able to help you understand your options and recommend the most appropriate way forward for you and your company.
Depending on the financial position of the company and its likely future viability, these options could include an attempt at rescue via a process of administration or by entering into a Company Voluntary Arrangement (CVA), or liquidation if the company is beyond the point of rescue.
How Scotland Liquidators can help
If you believe your company is insolvent and you are worried about wrongful trading, contact the experts at Scotland Liquidators. Our team of licensed insolvency practitioners will talk you through your options and be with you every step of the way.
