Wrongful and insolvent trading: A brief guide

Anyone who is running a business should seek professional advice at the very first sign of financial difficulties. Struggles to pay rent, bills or creditor accounts could be a sign that the firm is failing and must be taken seriously. If the business continues without consideration for the financial situation a director can be accused of wrongful or fraudulent trading and may be at risk of being held personally liable for debts.

Insolvency practitioners are there to deal with liquidation and administration but must investigate the situation before being appointed. If misconduct is found then claims may be made against directors and they can be reported to the Insolvency Service. This may result in a disqualification from being a director for up to 15 years. Prison sentences of up to 10 years can also be made.

A claim called misfeasance may be made if an officer of a company has “misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of fiduciary or any other duty in relation to the company”. Such a claim usually applies in cases of theft or if company assets are kept for personal gain. In liquidations, a misfeasance claim may be applied to directors who enlarged their salaries, or those who gained personally from taking company services, goods or equipment.

Any employee or manager could be at risk of a misfeasance claim, but it is more often that directors are the culprits. Claims can be made by the official receiver, liquidator, creditor or shareholder when the company has entered a formal liquidation.

The claimant has to prove that the defendant has misapplied funds/property and/or breached their fiduciary duties.

It is easier to claim misfeasance than fraudulent or wrongful trading as the burden of proof is less. If the misfeasance claim is proven the claimant applies for a court order to make either:
The defendant repay or restore the money or property with interest or;
The defendant contribute a sum to the company’s assets.

Furthermore a negative report is filed by the liquidator with the Insolvency Service, which may then ban the person from acting as a company director for a set period.

Directors stand a better chance of defending against misfeasance claims if they have taken professional advice regarding debts and financial struggles as early as reasonable.