When your business enters insolvency it can sometimes be difficult to fully understand the ins and outs of it all. If a company carries on trading even though it has been declared insolvent there can be severe consequences, but they vary depending on the situation. It’s important to highlight the difference between wrongful trading and fraudulent trading here.
Wrongful trading is perhaps less serious than fraudulent trading but it also more common and should be avoided where at all possible. Wrongful trading occurs when the director of a company continues to trade after they’ve realised that liquidation or insolvency was completely unavoidable. This is a serious issue as it puts the interests of any creditors in jeopardy. Insolvency and liquidation practices are designed not only to help you wrap up your company in a legal and clean way, but also to ensure that everything possible is done to ensure your creditors can recover their debts. This is why your assets are liquidated and cash flow diverted. Continuing to trade once you know liquidation is inevitable puts all of this at risk and can work against you when the time comes to declare insolvency.
Only a liquidator, often in the form of a licensed insolvency practitioner, can raise a wrongful trading claim as part of their investigation into why the company failed. This is most often the case when the company in question is forced into compulsory liquidation by annoyed creditors, and hire a practitioner to get things done.
To mitigate the risk of wrongful trading liability claims, there are one or two things you can do:
- Get help. You shouldn’t really assume that just because your company is facing financial hardships you should stop trading. Of course, you have to look out for the best interests of your creditors but if there’s still hope for your business there may never be any reason to wrap things up. It’s a fine balance of judgement, and the call can be made easier by enlisting the help of a licensed insolvency practitioner.
- Do some internal reviewing. It’s an excellent idea to prepare a few audits and business reviews if you are genuinely optimistic about the future and think that your business will survive what you think is a temporary struggle. If you can get your reports in order and prove to an outside party that there was hope for the business, you protect yourself by proving the risk was indeed worth it, and that you were still acting in the best interests of your creditors.
In any case, it’s important to make sure that all directors are fully informed of the company’s complete final situation so that a good judgement call can be made. Hold regular board meetings and get everyone with a say in the business involved – and make sure everything gets documented.