Wrongful Trading Solicitors | London

Introduction

Wrongful trading is one of a number of claims that can be brought against directors, or former directors, of insolvent companies. The offence of wrongful trading does, therefore, arise in a corporate insolvency context and is a statutory offence under sections 214 and 246ZB of the Insolvency Act 1986 (“IA 1986”), regarding liquidations and administrations respectively.

Wrongful trading claims are brought by insolvency office holders pursuant to the aforementioned provisions of the IA 1986 with a view to obtaining an order that the director(s) or former director(s) of a company must contribute to the insolvent company’s assets for the benefit of the company’s creditors.

A claim for wrongful trading can be brought against a director or shadow director of a company if a company has entered insolvent liquidation and, before the administration or liquidation of that company commences, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid entering insolvent liquidation or administration (s. 214(2)(b) IA 1986). The individual must have been a director or shadow director of the company at the time they had or ought to have had the requisite knowledge (s. 214(2)(c).

Importantly, if a director who knew that their company had no reasonable prospect of avoiding insolvent liquidation or administration took every step possible with a view to minimising the potential loss to the company’s creditors (s. 214(3) IA 1986), it would be a defence to a wrongful trading claim and a court would not make an order against the director.

Should you require assistance in bringing or defending wrongful trading proceedings, or should you want to discuss the risks of such proceedings being brought and/or any alternative options available, please do not hesitate to contact our team for an initial discussion.

Edwin Coe’s restructuring and insolvency team are highly experienced and are able to assist with all aspects of advising on, bringing and defending wrongful trading proceedings. We frequently act for office holders bringing wrongful trading claims, as well as for company directors in defending wrongful trading claims. We are also experienced in bringing and defending enforcement proceedings should they become necessary.

Acting for both insolvency office holders and directors, we are able to consider each unique set of circumstances from the perspective of both the office holder and a director client. In turn, this enables us to provide timely legal advice whilst considering strategy and commerciality for both parties.

Services we offer in this area include:

Advising insolvency office holders in respect of bringing wrongful trading claims and on all aspects of the process from drafting proceedings to settlement negotiations or trial

Advising directors as to their conduct and their risk as to the prospects of wrongful trading proceedings being brought against them

Assisting directors as to defend wrongful trading claims, advising on merits of defence, assisting with settlement negotiations where possible

Advising directors in respect of disqualification proceedings arising from wrongful trading claims and assisting with defending disqualification proceedings

Advising on all other claims arising from a directors conduct as may be appropriate for the insolvency office holder(s), the creditor(s) and/or the director(s).

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Claims against Directors

Personal Insolvency

Corporate Insolvency

Administration
Individual Voluntary Arrangements
Company Voluntary Arrangements
Members Voluntary Liquidation
Creditors Voluntary Liquidation
Statutory Demands
Winding Up Petitions: Guidance for Creditors
Winding Up Petitions: Rescinding an Order
Winding Up Petitions: Defending an Order
Compulsory Liquidation
Restructuring Plans

Key Information

Who can bring a claim for wrongful trading?

Both liquidators and administrators can bring claims for wrongful trading and can also assign wrongful trading claims to third parties, for example, a creditor.
Who might be liable for wrongful trading?

Sections 214 and 246ZB IA 1986 are drafted such that a wrongful trading claim can only be brought against current and former directors of a company, as well as shadow directors of the company.

The individual against whom the wrongful trading claim is made must have been a director of the company at the time that the individual knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration.

Importantly, an individual will only be liable under s. 214 IA 1986 if it can be shown, on a net basis, that the company is worse off as a result of the company continuing to trade.
How is a wrongful trading claim brought?

A claim for wrongful trading is brought by way of an application notice, the content of which is specified in rule 1.35 of the Insolvency (England and Wales) Rules 2016 (“IR 2016”). The information to be included on the application notice is the nature of the remedy and the provision pursuant to which the application is being made.

In accordance with usual practice, a witness statement in support of the application, together with any supporting documents enclosed within an exhibit, should be filed with court and served on the respondent.

In order to ensure that the application is made properly and is procedurally compliant, we would recommend seeking legal advice. Edwin Coe are well placed to assist.
What are the consequences of wrongful trading for directors?
Primarily, directors that are found liable for wrongful trading can be held personally liable for the company’s debts. The usual order that would be made by a court that finds a director guilt of wrongful trading, is an order compelling the director to make such a contribution to the assets of the company as the court thinks proper, which is usually a financial contribution for which the director is personally liable.

In considering the quantum of the contribution the director is to make to the company’s assets, the court will consider:
- the increase in the net deficiency of the company’s assets from the time when the director first knew, or should have known, that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, to the date of entering insolvent liquidation or insolvent administration;
- the loss to the company pursuant to s. 241(1) IA 1986; and
- the availability of a defence pursuant to s. 241(3) IA 1986.
Directors may also be subject to disqualification proceedings, resulting in a director’s disqualification order. If a disqualification order is made, it means the director who is the subject of the order is unable to act as a company director. The director would also likely to suffer damage to both their personal and professional reputation.
What are the elements of a wrongful trading claim?
In order to bring a successful wrongful trading claim, the applicant must demonstrate the following elements to the satisfaction of the court:
1. The company has entered insolvent liquidation
2. The director knew or ought to have known before the commencement of the winding up of the company that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration;
3. The director has not taken every reasonable step to minimise the loss to the company’s creditors; and
4. The individual was a director of the company at the time they had the relevant knowledge that the company would not avoid insolvent liquidation or insolvent administration.
There is no requirement to prove dishonesty for the purpose of bringing a wrongful trading claim, but the insolvency office holder will need to evidence to the satisfaction of the court that the director engaged in wrongful trading and that the company’s creditors suffered a loss they would otherwise not have suffered but for the directors actions in continuing to trade the company.
Who benefits from any recoveries made by an insolvency office holder who brings a wrongful trading claim?

If a wrongful trading claim is brought by the liquidator or administrator of a company, the proceeds of a claim for wrongful trading should be paid into a pool of assets for distribution amongst all unsecured creditors.

Pursuant to s. 176ZB IA 1986 which applies to liquidations and administrations commencing after 1 October 2015, any recoveries by a liquidator or administration in respect of a wrongful trading claim are not available to floating charge holders. Equally, recoveries made by a liquidator or an administrator are not available to secured charge holders either as a wrongful trading claim is a statutory remedy available to an insolvency office holder as opposed to a right belonging to the company itself.
Does the pari passu principle apply to recoveries made by an insolvency office holder?

The pari passu principle, which is a fundamental principle of English law, applies. The principle states that, as far as possible, where a debtor enters a formal insolvency process unsecured creditors and, by extension, their interests in any proceeds should be treated equally.

In the event that there is a limited sum of money that is available for distribution amongst the creditors, which may include a sum recovered pursuant to a claim for wrongful trading brought by an office holder, that sum of money will be divided between each of the debtor’s unsecured creditors. This means that each unsecured creditor will receive the same number of pence in the pound upon the distribution of the funds that are available. There is no special priority awarded to any unsecured creditor, even if they are the victim of dishonesty or deceit.
What are the relevant statutory provisions?
S214 IA 1986 “Wrongful trading”
- “Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.
- This subsection applies in relation to a person if—
  1. the company has gone into insolvent liquidation,
  2. at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation [or entering insolvent administration], and
  3. that person was a director of the company at that time
but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.
- The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company’s creditors as ([on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)]) he ought to have taken.
- For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both—
  1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
  2. the general knowledge, skill and experience that that director has.
- The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.
- For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.
(6A) For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration.]
- In this section “director” includes a shadow director.
- This section is without prejudice to section 213.”
s246ZB IA 1986 Wrongful trading: administration :
- “Subject to subsection (3), if while a company is in administration it appears that subsection (2) applies in relation to a person who is or has been a director of the company, the court, on the application of the administrator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.
- This subsection applies in relation to a person if—
  1. the company has entered insolvent administration,
  2. at some time before the company entered administration, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid entering insolvent administration or going into insolvent liquidation, and
  3. the person was a director of the company at that time.
- The court must not make a declaration under this section with respect to any person if it is satisfied that, after the condition specified in subsection (2)(b) was first satisfied in relation to the person, the person took every step with a view to minimising the potential loss to the company’s creditors as (on the assumption that the person had knowledge of the matter mentioned in subsection (2)(b)) the person ought to have taken.
- For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which the director ought to reach and the steps which the director ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both—
  1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
  2. the general knowledge, skill and experience that that director has.
- The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which the director does not carry out but which have been entrusted to the director.
- For the purposes of this section—
  1. a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration;
  2. a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.
- In this section “director” includes shadow director.
- This section is without prejudice to section 246ZA.”