Representing you in life & business

Blandy & Blandy Solicitors

Insights // 19 December 2016

Directors’ Liability for Wrongful Trading

Partner David Few, in our Corporate & Commercial team, explains wrongful trading and the liability of directors.

The recent case of Re Ralls Builders Limited has confirmed that directors cannot escape a wrongful trading claim by making payment to some creditors and leaving others unpaid. The judgment highlights the significance of seeking appropriate professional advice when directors consider their company to be in financial difficulties.

Wrongful trading occurs when a director allows a company to continue trading even though it is clear that the company is heading towards insolvent liquidation, and if by continuing to trade, the directors fail to mitigate the loss to individual creditors (s214 Insolvency Act 1986) (the “Act”). Directors can be personally liable for the company debts if the directors continue to trade wrongfully. 

The threshold for a successful wrongful trading claim is that the directors knew, or ought to have known, that there was no reasonable prospect of avoiding an insolvent liquidation. 
If directors take every step with a view to minimise the loss to creditors whilst continuing to trade, the Act provides a defence to directors for wrongful trading.  This defence is however designed to be a “high hurdle for directors to surmount”. 

In Re Ralls Builders Limited, the company had made trading losses in 2009, suffered from a business closure in the beginning of 2010 and suffered further financial losses that year.  By June 2010, it was apparent that the company was in financial difficulties and faced serious pressure from creditors. The directors however continued to trade, and made a profit during this period, until the company was put into administration. Overall, the creditor position of the company had slightly improved, but some creditors were paid whilst others were not.  The liquidators sought an order that the directors be personally liable for the unpaid creditors’ increased losses. 

The judge did not make an order for payment against the directors. It was held that it was conceivable that continued trading had not caused loss to the company or worsened the creditors’ position and therefore the directors were not liable to contribute to the assets of the company to compensate the unpaid creditors. The judge also considered the extent to which the directors sought professional advice at an early stage, and it was considered reasonable for the directors to rely on the advice sought. 

This case emphasises that seeking professional advice may help directors in establishing a defence under the Act following a finding of wrongful trading. Directors however should be warned that that seeking advice in itself will not absolve their liability for wrongful trading. Directors are advised to also regularly conduct reviews of their company’s financial position and take steps to ensure that they are kept abreast of the overall status of their company. 

In addition, this case serves as a reminder that directors should seek advice on their legal duties as soon as there are any concerns in respect of the company facing financial difficulties. 

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

David Few

David Few

Notary Public

Read Bio