Wrongful Trading Flashcards
What is the statutory basis for wrongful trading?
1) Liquidation
2) Administration
What is wrongful trading?
Directors who negligently continue trading when insolvency is inevitable, thereby worsening the position for creditors
Who can bring a claim of wrongful trading?
1) Liquidator
2) Administrator
Who can be liable for wrongful trading?
Any director (including de-facto, shadow and non-executive)
What is the two-part test for liability for wrongful trading?
1) Knowledge of insolvency
2) Failure to minimise loss
What must the court be satisfied with under the knowledge of insolvency limb?
1) Company went into insolvent liquidation / administration
2) Director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvency
What must the court be satisfied with under the failure to minimise loss limb?
Company continued trading after the “point of no return”, and that continuation worsened the position of creditors
How can directors avoid liability for wrongful trading?
With the every step defence
What is the every step defence?
If they took every step to minimise losses to creditors after they realised insolvency was inevitable
What are examples of ‘every step’ actions?
- Raising concerns at board meetings
- Taking independent legal/accounting advice
- Regularly reviewing up-to-date financial information
- Cutting costs/liabilities
- Avoiding further borrowing
- Considering restructuring or formal insolvency proceedings
What is the standard of the wrongful trading test?
The reasonably diligent person test
Is the reasonably diligent person test subjective or objective?
Both
What is the objective and subjective test under reasonably diligent person test?
What would a reasonably diligent person with the director’s role and actual knowledge/skills have done?
What remedies may a court order for wrongful trading?
1) Compensatory contribution to company’s assets
2) Joint and several liability between directors
3) A disqualification order
