Company Insolvency: wrongful trading

Company Insolvency: wrongful trading

Company directors may not be able to defend a wrongful trading charge if they fail to treat creditors equally in the face of a potential potential administration or insolvent liquidation.  Top Bahamas law firm ParrisWhittaker is highly experienced in advising companies on their insolvency and other corporate and commercial matters.

Wrongful trading takes place if a director knew, or ought to have known, that there was no reasonable prospect of avoiding an administration, or winding up because of insolvency, but failed to take ‘every step’ to minimise potential losses to creditors.

A UK High Court ruling (which has persuasive effect on the courts in The Bahamas) in a case where a company liquidator accused the directors of ‘wrongful trading’, has important implications for companies and their directors.

What happened in this case?

A company got into difficulties, but the company directors had (rather unwisely) continued to trade in the hope that the usual summer upturn in their industry (amongst other expected developments) would improve things or the company.

As a result, some creditors had been paid while the company continued to trade, while others had not.  The court had to consider whether or not the directors could rely on the defence that they had taken ‘every step’ to minimise the loss to creditors - a ‘high hurdle for directors to surmount’, said the court.  The court held that paying off some creditors and not others could not amount to taking every step to minimise the loss to creditors and the directors could not therefore rely on their defence.

However, although the directors ought to have concluded by a certain date that there was no reasonable prospect of the company avoiding insolvent liquidation, their continued trading had not caused loss to the company overall or worsened the position of the creditors as a whole.  Actual loss was therefore required for the claimants to win their claim.

Importantly, the court noted the importance of directors taking professional advice at the right time, and updating it if circumstances changed, in order to be able to rely on the defence.

What does this mean?

Company directors must be careful if they continue to trade when their company gets into difficulty.  It is important to take professional advice as soon as possible (more than once if necessary). Acting on that advice will be critical should an allegation of wrongful trading reach the court.

How can we help?

For expert, incisive legal advice on all matters relating to company law and the law relating to directors’ duties, call the experienced company lawyers at ParrisWhittaker. Whatever your circumstances and however complex your case, we are ready to act on your behalf.

1 Ralls Builders Limited (in liquidation) [2016] EWHC 243