Wrongful trading

Question 1

What are the key differences between wrongful trading and fraudulent trading?

Answer 1

• WT are claims to directors who carry business negligently as opposed to FT which is based on fraudulently
• there is no criminal provisions for WT just FT
• FT due to requirement of dishonest intent meant evidential burden was high but WT does not require intent or dishonesty

Question 2

What is the purpose of wrongful trading?

Answer 2

That directors become aware that when liquidation or administration is reasonably inevitable, they are under a duty to take every step possible to minimise potential losses to company’s creditors
* failure can lead to court ordering director tocontribute to insolvent estate by way of compensation for losses that general body of creditors have sufferd due to director’s conduct = imposes personal liability (exception to limited liability)

Wrongful trading = failure of directors to make right judgment about company’s financial prospects and then failing to take steps to minise losses to creditors

Question 3

Who may bring a claim under wrongful trading?

Answer 3

Liquidators and administrators - they can also assign wrongful trading claims to third party as way of raising funds for insolvent estate thereby avoiding risk of litigation

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Question 4

Against whom may a claim be brought?

Answer 4

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

Question 5

What first limb that needs to be satisfied for a director to be potentially liable for wrongful trading?

Answer 5

Court must be satisfied company has gone into insolvent liquidation or administration and:
1) at some time before commencement of winding up or insolvent administration (point of no return)
2) director knew or ought to have concluded that
3) there was no reasonable prospect that company would avoid going into insolvent liquidation or administration

= only where directors concluded or ought reasonably to have concluded there is no reasonable prospect is limb 2 considered - if not, no further steps as they do not satisfy limb 1

company goes into insolvent liquidation or administration where assets are insufficient for payment of debts and other liabilities and expenses

Question 6

If first limb is satisfied, what then needs to be proven (limb 2) for a director to be liable for wrongful trading?

Answer 6

Must be proven that
* director in question allowed company to continue to trade during period they knew or ought to have known there was no reasonable prospect company would avoid going into insolvent liquidation or administration
* and that continued trading made company’s position worse

= if company has not reached point of no return then wrongful trading liability cannot arise and no need to consider defence

WT is based solely on balance sheet test: liabilities are greater than assets and NOT cash flow test: inability to pay debts as they fall due

Question 7

What is the ‘every step’ defence?

Answer 7

Directors will have no liability for wrongful trading if they can satisfy to court that after they knew or ought to have concluded that there was no reasonable prospect of company avoiding insolvent administration or liquidation, they took every step with a view to minimise potentil loss to company’s creditors
* e.g., voicing concerns at BM
* seeking financial and legal advice
* suggesting reduction in costs
* no incurring further credit or increaing credit
* taking advice on steps to initiate appropraite insolvency procedure

Question 8

What is the ‘reasonably diligent person’ test?

Answer 8

The test courts use in which facts director ought to have know or ought to have reasonably concluded and steps he ought to have taken are those which would have been known or ascertained, reached or taken, by a reasonably diligent person having both:
* general knowledge, skill and experience that may be reasonably expected of person carrying same functions as director = objective test (minimum standard)
* and actual knowledge, skill and experience of that particular director = subjective test

= courts applies higher of two standards

Question 9

What advice should be given to directors to minimise risk of wrongful trading?

Answer 9

• hold frequent BMs to review company’s financial position - write minutes so there’s written record
  
  • BM should consider relevant issues such as whether director consider on reasonable grounds that company can avoid an insolvency
• take professional advice as soon as possible
• make sure they have up-to-date financial information about state of company’s finances and this should be considered at BM and acted upon

directors cannot escape liability by resigning - only consider resigning if constantly out voted by other directors and therefore unable to persuade them to change

Question 10

What remedies are available for wrongful trading?

Answer 10

Court can order director make such contribution to assets of company as they think fit
* contribution will increase asset of company available for distribution to unsecured creditor
* wide discretion on court to determine extent of director’s liability - ordinarily based on additional depletion of company’s asset caused by directors’ conduct from date directors ought to have concluded company could not have avoided point of no return
* contribution is compensatory not penal in nature
* contribution against directors can be joint and several or court may apportion liability based on culpability of directors
* court has discretion to make a disqualification order against director

Question 11

Are they any reliefs available to directors for wrongful trading?

Answer 11

No relief available in wrongful trading proceedings

Question 12

In addition to FT and WT, when may a director be held personally liable to compenate company and creditors?

Answer 12

If found guilty of misfeasance - this covers director’s duties breached
* court may order person to compensate company in respect to money or property missapplied as a result to misfeasance
* claim can be** brought by liquidator** (not administrator), official receiver or any creditor or contributory
* claim can be brought against former directors, liquidators, or administrative receivers
* burden of proof is on C to establish misfeasance on part of director or other defendants
* ratification by shareholders is not possible for breah of directors’ duties at time when company’s asset has decline to such extent there is reasonable prospect company will go into insolvent liquidation or administration