Wrongful Trading and Fraudulent Trading Explained

2 August 2017

What is wrongful trading? What is fraudulent trading?

Wrongful trading is where an insolvent company has continued to trade in a way which worsens the position of the creditors that any reasonable director would not have allowed.  This is not the same as trading whilst insolvent or fraudulent trading.  Fraudulent trading is of course a criminal offence and is not that relevant in an insolvency context. Wrongful trading is defined in section 214 of the Insolvency Act 1986.

Is the company insolvent? If yes then the directors must act properly and responsibly. If they do not act properly or the way any reasonable person would have acted, then this may possibly be seen as acting wrongfully or trading whilst insolvent. If wrongful trading is proven, then the directors can be made personally liable for the company's debts from the time they knew the company was insolvent.

The tests for wrongful trading actions include:

  1. Not filing Annual Returns for the company at Companies House.
  2. Not filing annual or audited accounts at Companies House.
  3. Not operating the PAYE scheme correctly, failing to pay PAYE and NIC when due, building up arrears.
  4. Not operating the VAT scheme correctly, building up arrears.
  5. Taking excessive salaries when the company cannot afford them.
  6. Taking credit from suppliers where there was no "reasonable prospect" of paying the creditor on time.
  7. Willfully piling up debt.
  8. When in a hole keeping digging!

Points 5,6,7 are stronger than the others as you would expect.

Please note you don't have to tick all of the above tests to be at risk.

Recent case law has upheld that view that it is very difficult to be accused of wrongful trading if you have not acted fraudulently or deliberately.  But it highlights that fact that directors must act in the best interest of creditors when a company becomes insolvent.  

Wrongful trading risks only apply in terminal insolvency such as liquidation.

Wrongful trading can only apply in terminal insolvency and can only be commenced after a formal insolvency event such as liquidation or administration.  You cannot be charged with wrongful trading until the business has actually ceased to trade .  If the 

What if there is no insolvency event?

These actions may occur even though the company may not enter any formal insolvency. If that happens, then be very careful! Keep records of why returns were not filed on time. Write careful minutes of board meetings and shareholders meetings. Keep them safe. In future they may help protect you as a director. The common sense answer to wrongful trading is if your company is insolvent and you know it DON'T KEEP DIGGING THE HOLE! Take advice from us immediately on 0800 9700539.

If the company is still viable but just needs breathing space why not propose a Time to Pay deal? See our guides to Time to Pay deals or to buy our Experts Time to Pay Programme(click the link).Trading whilst insolvent - new guide page

Personal Liability

Remember that if the company is terminally insolvent you may be personally liable for the debts, if you continue to trade. whilst doing nothing about the problems that it faces. 

Wrongful trading can be a real problem where ongoing tax arrears are building up and the company and enters insolvent liquidation. So, act carefully, keep notes of any decisions and always write down the names of people you speak to at HMRC. Take advice from experts, above all act promptly, as delay may just lead to more problems for you as directors.

What are the available options?

  1. Time to Pay Deal with Tax and VAT. Why not use our expert programme, written by our MD Keith Steven? We guarantee you'll get a time to pay deal with HMRC or your money back.
  2. Trading out - Visit this guide to how to deal informally with the problem. This can avoid formal approaches like voluntary liquidation, CVA, compulsory liquidation and administration.

Some important tips

  1. Don't wait until legal actions have been taken against the company to ask for a "time to pay" deal with HMRC.
  2. Try to plan the cashflow of the business well in advance - you have a legal obligation to be able to meet cashflow requirements! If the directors do not think the company has sufficient cash to trade, they should consider their obligations and options and plan a way forward.
  3. Don't be too ambitious in planning repayment; you will have bad months as well as good, so be careful with the cashflow forecasts.
  4. Be realistic about your expectations.  Ask for 18 months to pay back PAYE, knowing that you will probably get 6-9 months at most.
  5. Ask for 6 months for VAT.
  6. If your cashflow forecast says you cannot afford that fast a repayment programme, then consider a company voluntary arrangement - CVA.
    We think that, if the company is viable but insolvent, this is the most powerful way of dealing with a serious cashflow problem and tax arrears (which proves insolvency). Important tips,
  7. HMRC supports well proposed CVAs!
  8. The company does not have to pay back all of the debt.
  9. Directors remain in control
  10. Do Nothing! Are you serious? This may lead to: Bailiffs, Sheriffs, walking possession, distraint and more worry - see here for How to deal with Legal Actions and formal insolvency like Creditors Voluntary Liquidation, Administration, Administrative Receivership.

So don't risk wrongful trading it could lead to personal action against you, the loss of your home, your marriage and bankruptcy. Act properly and Don't wait too long to get professional turnaround help. Call the experts in complete confidence on 020 7887 2667 or 08009700539 or fill out the form below.

Author: Keith Steven

The Ultimate Guide For Worried Directors

The Ultimate Guide For Worried Directors

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