Wrongful Trading - The Insolvency Act 1986

The Insolvency Act 1986

The principle of wrongful trading was introduced in the Insolvency Act 1986, to complement the concept of fraudulent trading. Unlike fraudulent trading, wrongful trading needs no finding of 'intent to defraud' (which requires a heavy burden of proof). Wrongful trading is therefore a less serious, and more common offence than fraudulent trading.

Under UK insolvency law, wrongful trading occurs when the directors of a company have continued to trade a company past the point when they:

• "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation"; and
• they did not take "every step with a view to minimising the potential loss to the company’s creditors".

Wrongful trading is an action that can be taken only by a company's liquidator, once it has gone into insolvent liquidation. (This may be either a voluntary liquidation - known as Creditors Voluntary Liquidation, or compulsory liquidation). It is not available to the directors of a company while it continues in existence, or to other insolvency office-holders such as an administrator.

Where, during the course of a winding-up, it appears to the liquidator that wrongful trading has occurred, the liquidator may apply to the Court for an order that any persons who were knowingly parties to the carrying on of such business are to be made liable to make such contributions to the company's assets as the court thinks proper.