What’s the Impact of Wrongful or Fraudulent Trading in Administration?
Prior to the Small Business, Enterprise and Employment Act, 2015 only liquidators could begin proceedings of wrongful or fraudulent trading against a company director suspected to have behaved wrongfully in the period leading up to the insolvency. Since the Act of 2015 however, this power has been also conferred upon administrators which increase the directors’ risk of personal liability in cases of administration.
What is the Distinction?
If your company is technically insolvent and unable to meet its bills but you still continue to trade then this is what is known as wrongful trading. Fraudulent trading, however, is a more serious matter because it implies the directors knowingly carried on trading without any intention to actually pay creditors back. Proving fraudulent trading depends upon what is known as the ’burden of proof’ and therefore requires concrete evidence to convict upon.
Fraudulent Trading and Phoenixing
In the past, unscrupulous directors could trade fraudulently before Phoenixing (restarting under a new guise) the company. Because administrators had no powers to investigate such a possibility (other than forcing the company into liquidation), the pre pack administration offered a loophole by which dishonest directors could exploit their limited liability to their own ends. The amendment to the law in 2015 ended this possibility since administrators now have the power to bring an action of misfeasance against the directors. Misfeasance means that a director is guilty of a breach of duty against their company – a duty clearly laid out in Section 170-177 Companies Act 2006.
Third Parties can now also make Wrongful or Fraudulent Trading Claims Against Directors
As per the Small business, Enterprise and Employment Act 2015, third parties such as creditors can now also make claims against company directors. Formally, only officeholders were permitted to do this. This law includes the possibility to accuse directors of preference towards a particular creditor or selling assets below their market value.
Putting a company into administration could provide the solution your business desperately needs, however you should seek professional advice before doing so. Get expert support and advice by giving us a call on 08000 746 757 for a no-obligation, free consultation.