Office holders Powers part 22

Section 214 of the Insolvency Act 1986 deals with wrongful trading. For the section to bite the relevant company has to have gone into insolvent liquidation and the person has to have been a director of the company at that time (although for these purposes being a shadow director will be sufficient: for the definition of shadow director see Office holders Powers part 13). If those are satisfied, then there is wrongful trading if at some time before the commencement of the insolvent winding up of the company, (being a date on or after 28th of April 1986) the relevant director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Insolvent liquidation for these purposes is going into liquidation when its assets are not enough to pay its debts and liabilities and the expenses of the winding up.

Even if those grounds are satisfied the court is not to make a declaration of wrongful trading if it is satisfied that after the time at which the person knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation, that person talk every step with a view to minimising the potential loss to the company's creditors as he or she ought to have taken. If the section is shown to be applicable, then this defence is one which the directors against whom proceedings are taken have to prove on a balance of probabilities.

As regards the knowledge of the director and the facts which ought to be known and the conclusions which ought to be drawn and steps taken there is a twofold test. One was what one would expect to be done by reasonably diligent person who has a general knowledge skill and experience that could reasonably be expected of a person carrying out the functions that that director carried out in relation to the company. The other is the same in respect of the general knowledge skill and experience which that director has. Thus the director cannot be excused through being incompetent because they will be judged by ordinary standards of competence. However if they have specific skills, a higher standard may be found to apply.

If the claim is successful then the director against whom proceedings are brought can be made liable to make such contributions (if any) to the company's assets as the court thinks proper. That contribution will be held by the liquidator for distribution to the unsecured creditors. It is meant to reflect the loss attributable by the company carrying on its business in the way complained of.

One difficulty the liquidators have is pinpointing the date at which the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation. Although the court can specify its own date, the liquidator will be tied to the date or dates pleaded. Sometimes therefore one difficulty in such claims is that there can be a problem in demonstrating that the date chosen is the correct one. There will be some tension here. The later the date, possibly the easier it is to succeed. However the earlier the date, probably the greater the amount would be that the court may in favour of the unsecured creditors pursuant to the declaration. Therefore this is a particularly tricky issue for anyone bringing such a claim to address. Too late and you risk missing out on an important part of compensation. Too early and you risk losing whole case. What makes this more difficult is the test as to whether the directors knew or ought to have concluded that the company could not avoid entering insolvent liquidation. That is not necessarily the same as the company being insolvent at a particular time. Sometimes the prospect of trading make it unlikely that insolvent liquidation is all but inevitable. In addition of course given the defence of taking steps to protect creditors, sometimes carrying on business is necessary to preserve the value of the assets. It is not necessarily the case that the safest course having regard to the interests of creditors is for trading to be stopped in a peremptory fashion.

If directors have taken professional advice then they are unlikely to be successfully pursued under this section in respect of the period when they have taken such advice.

These proceedings have to be brought within six years of the date when the company entered into insolvent liquidation.