Wrongful Trading and Director Personal Liabilities

Wrongful Trading and Director Personal Liabilities tend to go together. If a company is deemed to be Wrongfully Trading and goes into administration or liquidation, the directors would incur personal liabilities.  Even if outright dishonesty is not involved.

Wrongful Trading is placing orders with no reasonable expectation of being able to pay for them when the bills fall due.  This also applies to taking customers deposits without any reasonable expectation of being able to fulfil those orders.

Remember that the board is deemed to be the controlling brain of the company and that all Board decisions are legally collective decisions of the entire board.  The votes of individual individual  directors, whether for or against a particular decision are not relevant.  Even if some directors did not attend a board meeting, let alone participate in the board discussions that led to the Wrongful Trading, they are all still collectively liable for the consequences of any Wrongful Trading. Hence Wrongful Trading and Director Personal Liabilities are usually linked.

If companies have made also illegal director loans, those would increase the personal and legal liabilities of the Company Directors.

During Covid-19 the Wrongful Trading rules were temporarily suspended. Because even if a business was not directly impacted by covid-19, many of their clients might have suffered financial difficulties due to covid-19 and hence have been unable to pay them. The Wrongful Trading rules were fully reinstated from 1 October 2020.

Many companies were lulled into a false sense of security by their apparently healthy cash balances, which were inflated by the readily available Bounce Back Loans, BBL.  The BBL loan monies were automatically transferred into their main bank accounts.  Interest was charged after 6 months and all of that BBL cash will eventually have to be repaid.

One significant impact  of Covid-19 is that investors have become much more focused on the strength of the balance sheet and in particular the liquidity of the company.  Previously they were much more focused on the P&L, especially EBITDA.

To understand more about the Balance Sheet and how EBITDA and liquidity are calculated, please click the following link: Learn more about Board Level Finance

Or visit the Professional Directors Association

Wrongful Trading and Director Personal Liabilities