News

Are you trading wrongfully?

In the current economic climate, some companies are experiencing difficulties and we thought you should be aware of a number of legal implications and situations where you, as a director/shareholder may become personally liable.

Wrongful trading is potentially a very serious issue for directors of companies which become insolvent and go into liquidation. It is possible that the liquidator could bring a claim against a director if they believe that at some point prior to winding up, the company knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation.

The defence for the director is to show that he took every reasonable step to minimise the potential loss to creditors; this includes seeking and taking advice. If wrongful trading is established, then the Courts can order the director to make such contribution to the company´s assets as the Court deems fit.

There are also potential claims for transactions at an undervalue or if preference is given to one creditor over another. These can apply to companies in either liquidation or administration and both come with a requirement of the director to disprove.

A further issue can arise from the payment of dividends which, from a tax perspective, has been the favoured form of remuneration for a number of years now. The payment of a dividend requires distributable reserves. If money taken out of the company exceeds distributable reserves, then the excess becomes an overdrawn director´s loan account, with the intention that it will be repaid by the director or cleared by future dividends declared.

The problem comes if the company then becomes insolvent, as the overdrawn loan account will be considered to be an asset of the company, with the liquidators seeking recovery. Furthermore, directors have a duty to assess the cash requirements of the company and may become liable to repay dividends if they are considered not to have had regard to the future cash flow requirements of the company.

It´s not often that we hope that what we write about is of no relevance to you, but this is one of those occasions.

If you have any concerns about your company´s ability to continue to trade, or need help with budgeting, please contact Mark Goodband to minimise any risk that you may be held personally accountable.