Wrongful Trading & Director Conduct: What Gets Examined?
Wrongful trading is not established merely because a company became insolvent or continued trading while insolvent. Broadly, the issue can arise where a director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation, subject to the statutory test and the steps taken thereafter. It is highly fact-specific.
When insolvency occurs, directors’ duties shift toward protecting creditors. Directors should protect assets, treat creditors appropriately, avoid worsening creditors’ position and consider insolvency advice. Personal consequences can arise in circumstances including wrongful trading, fraudulent trading and misfeasance.
What this means for the director
Trading while insolvent does not, by itself, establish wrongful trading. The relevant questions include what the directors knew or ought to have concluded about the company’s prospects, when that position arose, what information was available and what steps were subsequently taken. Reconstruct the history from contemporaneous evidence rather than retrospectively rewriting it.
Records matter because hindsight is not evidence of what was known at the time.
What happens next
In administration or liquidation, the office-holder examines company affairs and director conduct. In an insolvent-company investigation, the office-holder submits a conduct report to the Insolvency Service, which can decide whether further investigation is warranted.
Potential concerns can include continued trading to creditors’ detriment, poor records, misuse of assets and failure to meet regulatory obligations.
Issues to establish
Board minutes. Management accounts. Cash-flow forecasts. Creditor ageing. HMRC arrears. Professional advice received. Dividends and drawings. Director’s loan transactions. Payments to connected parties. Asset sales and transfers. New credit taken. When insolvency became apparent. Decisions made after that point.
Conduct evidence checklist
- Date the significant decision.
- Record what information existed.
- Identify who made the decision.
- Locate professional advice.
- Explain the commercial reasoning.
- Preserve the documents.
Questions directors usually ask
Does company failure mean disqualification?
No. Disqualification concerns director conduct, not merely the fact that a company became insolvent.
Should I change old records to explain what happened?
No. Preserve genuine contemporaneous records and obtain appropriate advice.
Will my conduct be reviewed?
Director conduct forms part of the insolvency reporting and investigation framework.
Related authority pages
General information disclaimer
General information only. Insolvency, tax and director-liability outcomes depend on individual circumstances. Nothing on this page constitutes legal, tax or insolvency advice. Where insolvency is suspected, advice from an appropriately qualified professional should be obtained promptly.
Establish your position
Director conduct is judged on facts. Build the facts.