Wrongful Trading

Question 1

Is wrongful trading a civil or criminal offence?

Answer 1

It is a civil offence only. Unlike fraudulent trading, there are no criminal penalties.

Question 2

Can a wrongful trading claim be assigned to a third party?

Answer 2

Yes.

Question 3

Who can be liable for wrongful trading?

Answer 3

Any person who was a director at the relevant time, including executive directors, non-executive directors, shadow directors, and de facto directors.

Question 4

3 Elements of Limb 1 for Requirement for liability?

Answer 4

1. The company went into insolvent liquidation or administration.
2. At some point before that, the director knew or ought to have concluded that
3. There was no reasonable prospect of avoiding insolvency.

Question 5

How is insolvency defined for wrongful trading purposes?

Answer 5

By the balance sheet test only

Question 6

What is the ‘point of no return’?

Answer 6

The moment when the director knew or ought to have known that insolvent liquidation or administration was unavoidable.

Question 7

What must be shown to establish liability beyond limb one?

Answer 7

That the director allowed continued trading after the point of no return, and that this worsened the company’s financial position.

Question 8

What if the company hasn’t reached the point of no return?

Answer 8

Then wrongful trading liability cannot arise, and the director is not required to take the “every step” defence.

Question 10

What test does the court apply to assess wrongful trading conduct?

Answer 10

The “reasonably diligent person” test

Question 11

What two standards make up this test?

Answer 11

Objective: knowledge, skill, and experience expected of a person in that director’s role

Subjective: actual knowledge, skill, and experience of the director
(The higher of the two applies.)

Question 12

Is resignation a defence to wrongful trading?

Answer 12

No. Resigning alone does not protect a director from liability and may, in fact, be wrongful if done to avoid responsibility.

Question 13

What remedy can the court order

Answer 13

A compensatory contribution to the company’s assets to reflect the loss caused from the ‘point of no return’.

Question 14

Can liability be shared among directors?

Answer 14

Yes. The court may impose joint and several liability or apportion the liability based on relative culpability.

Question 15

Can the court disqualify a director found liable for wrongful trading?

Answer 15

Yes