United Kingdom Company Law – Wrongful Trading

Wrongful trading

Unlike fraudulent trading, wrongful trading is not a criminal offence but a civil offence.

The concept of fraudulent and wrongful trading introduced by the insolvency act 1986 and under the companies Act 2006.

Fraudulent trading occurs when the management or directors of the company decided to continue business even they knew that it is impossible to avoid company from going into insolvent liquidation.

Liquidator must have to prove that directors had knowledge about the insolvent position of the company and they knew that there are no reasonable ways to avoid it from insolvent liquidation. Then the directors will be liable for this offence under the civil law.

Directors show irresponsible and negligent behavior in case of wrongful trading as the directors have responsibility to monitor the financial position of the company continuously and they have duty to inform the members when the worth of total assets falls below the certain value of liabilities.

In case of financial difficulties they immediately inform to the higher authorities and consult from insolvent practitioner by giving maximum protection to their creditors otherwise they will be liable to contribute in the assets of the company.

Directors are liable to contribute up to the extent of the loss or their negligence.

Case law

Re produce Marketing Consortium 1989

In this case law it was proved that a wrongful trading occurred by the directors so they are liable to contribute in the assets of the company. Two directors jointly paid £75000 to the liquidator of the company plus an interest also.

Difference between wrongful trading and fraudulent trading

According to the insolvency act 1986, the above two offences are different with their purpose, effects and penalties.

In wrongful trading director continue to do business while they knew that company is unable to pay debts when they fall due. But here there is no intention to defraud creditors, they just carry on business with the hope that thing will improve in near future. In the same time we know that directors have duty to give maximum protection to their creditors so directors are negligent if they failed to report the authorities on time about the financial position of company.

On the other hand in fraudulent trading the intention of directors is to defraud the creditors and they do business to collect maximum money before liquidation. Only the liquidator can find the truth that directors are held responsible for fraudulent trading.

So it is concluded that fraudulent trading is more serious offence (criminal offense) as compared to the wrongful trading (civil offence). And according to the nature of offence the liability of fraudulent trading is more severe than wrongful trading.

Other offences under insolvency Act 1986

Acting as director whilst disqualified

According to company directors disqualification act 1986,  a director may be disqualified by its wrongful acts or some other reason so he must stop from acting as director even in liquidation phase otherwise it will be considered as a crime and punished for it.

Creating phoenix companies

Phoenix companies are those which are created at the similar name of liquidated companies by the directors of insolvent companies. It is a serious crime as it leads to dishonesty and misleading behavior in the society. Directors are personally liable for the debts of the company.

Other frauds and deceptions in the companies

During liquidation phase or at the winding up phase all the systems and procedures distorted and collapsed so the chances of theft and frauds increased. Directors and employees may involve in steeling the company assets and manipulating the systems data.

Omission of material information

At the start of liquidation, a statement about the company affairs must be required by the liquidator which should be prepared correctly with full detail. Sometimes due to the negligence or voluntarily directors failed to put necessary information in that statement. So that a wrong decision may be taken by the liquidator due to lack of material information.

Misconduct during liquidation

Although the directors power ceased during liquidation but they have to follow the instructions of the liquidator. When they failed to act as they required then they will be liable to their misconduct. 

Offences under companies act 2006

Under the companies act 2006 there are some regulations related with the company operations, its management and its records. In the same way provisions are also included to monitor these regulations.

Following offences may create at the behalf of companies which the relevant officers are liable.

  • Company records
  • Accounting records
  • Filling account
  • Disclosures
  • Annual return
  • False information

Failure to keep Company records

According to the companies’ act 2006, all the public listed companies required to keep the company records for five years. So if they failed to do, the relevant officer (who assigned the duty to do so) will be considered as liable to the mistake.

Failure to prepare and file accounting records on time

As we know that, it is statutory obligation to prepare and file accounting records on time. These accounting records include the financial statements and other financial reports. They must be prepared on time by the accountant and then file to the registrar at the companies house on time.

Failure to make certain disclosures

Certain disclosures needed which must be published or reported in the auditor’s report. In the same way some disclosures also needed by the companies about its type, location and business and the concerned officers will be liable if they failed to do so.

Failure to file annual return

It is statutory duty to file the annual return on time by the companies. And failure to file the annual return brings a fine or punishment to the relevant officer.

Providing wrong or false information

Putting wrong or false information any document of the company or to make it public is also a serious offence because it leads to inappropriate or misleading behavior. And the punishment for this is imprisonment or fine.