When your firm is having trouble making money, it might be hard to run it. As a director, you also have a legal obligation to do what’s best for the firm and its creditors. If you don’t do enough, you might be accused of wrongfully trading, which could lead to serious repercussions like being disqualified and being held personally responsible. It is important to understand director responsibilities so that you don’t be accused of unfair trading and can deal with money problems in a way that is legal and moral.
What is wrongful trading?
Wrongful trading happens when directors of a company keep trading even though they know the company is bankrupt and has no genuine chance of recovering. If directors don’t do anything to mitigate the damage to creditors when insolvency becomes clear, they might be held personally liable under the Insolvency Act of 1986.
When you trade wrongfully, you don’t have to mean to deceive. The question is whether the directors were smart once they found out their company was going out of business.
Important Signs of Bad Trading
- Directors should be on the alert for signs that their company is going to go out of business. These are the signs:
- Can’t Pay Bills: If your firm can’t pay its bills on time to suppliers, workers, or the government.
- Trading All the Time While insolvent, you keep taking on new debts even if you can’t pay them.
- When statutory requests, County Court Judgments (CCJs), or winding-up petitions are received, creditors are not given any pressure.
- Credit oer-reliance is when you use extra loans or credit to pay for your continuous running needs.
- Financial disarray is when you can’t keep track of your money and accounts correctly.
- If you see any of these warning signs, you need to act fast to safeguard yourself and your business.
How to Stay Out of Trouble with Trading
Know what your role as a director is
As a director, it’s your job to act in the best interests of your creditors when your company is in danger. If it looks like your company will go bankrupt, your main responsibility changes from shareholders to creditors. Director responsibilities can help you make smart decisions and protect yourself from any legal problems.
Get professional help with bankruptcy as soon as possible
One of the best strategies to prevent being accused of illegal trading is to get professional help as soon as you start having money problems. You may get help with your legal problems by employing an insolvency practitioner. Some of the options they provide include administration, voluntary liquidation, and restructuring. If you act quickly, you may keep things from getting out of hand and show that you are responsible.
Stop Trading If Bankruptcy Is Likely
If there is no actual chance of getting back on track financially, creditors may lose more money if trading continues. Directors should think about stopping all business right now and looking into other options, such a Creditors’ Voluntary Liquidation (CVL). This lowers the chance of personal liability and lets creditors split up assets evenly.
Keep Accurate Records of Your Money
In bankruptcy, negligence is not keeping up with your financial documents. If you keep an eye on your money, cash flow, and responsibilities on a regular basis, you may see issues early and make smart choices.
Here are some best practices for keeping financial records:
- Keeping accurate and honest records of business transactions and money coming in and going out.
- Keeping accurate records of meetings and decisions taken by directors.
- Turning in tax returns and financial statements on time.
- Regular audits to check on the health of the finances.
- Keeping track of income, expenses, and debts accurately with the use of accounting software.
Be Honest and Open with Your Creditors
If your business is experiencing problems paying its bills, talk to your creditors honestly. Rearranging your obligations or agreeing to new payment schedules might show that you are taking steps to limit your losses.
Some of the choices are:
- Making a deal with HMRC to pay your taxes on time.
- Giving suppliers more time to pay.
- Looking into a Company Voluntary Arrangement (CVA) to help with debt restructuring.
- Keep detailed records of any communication with creditors to show that you are open.
Don’t add to your debt.
Wrongful trade is when a corporation takes on additional debt even if it is plainly going bankrupt. If the company can’t pay back its debts, the directors may be personally accountable for them. Instead, think about how to save expenditures and other methods to reorganize.
Don’t put certain creditors ahead of others
During a company’s bankruptcy, all of its creditors should be treated the same. Giving some creditors, such as directors’ loans, priority over others when it comes to repayment is also considered wrong. If the company goes bankrupt, these actions may be undone, and the directors might be held responsible.
Also, avoid making preferential payments because they might lead to arguments later on.
Have board meetings often and write down what you decide
Directors can look at the company’s finances as a group during regular board meetings. Writing down everything you say and do in detail could show that you did what was best for your creditors.
Be careful to go to meetings:
Check on the company’s finances on a regular basis.
Include legal and financial advice if you need it.
Keep a record of important decisions and the reasons for them.
Choose voluntary liquidation when you need to
If recovery isn’t conceivable, voluntary liquidation could be the safest option to end a firm. A creditors’ voluntary liquidation (CVL) lets directors close the firm in a smooth and orderly fashion by paying creditors what they are owed and lowering the number of illegal trade claims.
Also, receiving professional advice before starting any liquidation will assist you in avoiding making mistakes that could make you personally liable.
The Effects of Illegal Trading
If a director is found guilty of illegal trading, they might face serious consequences, such as:
Personal Liability: Directors may have to spend their own money to pay off the company’s obligations.
Disqualification from becoming a director: This might mean not being able to serve as a director for 15 years.
Creditor Legal Action: Creditors may be able to sue directors on their own.
In the future, companies may have to follow tougher rules, or their operations may be limited.
If directors act in the right way early on, they may avoid these kinds of problems and deal with money issues in the right way.
In summary
If you trade the wrong way, the bad results may endure a lifetime. You may avoid being blamed and having to pay for your mistakes by knowing what your director obligations are and taking steps to safeguard your creditors. Getting the correct bankruptcy guidance and being careful can protect you legally if your firm has a financial issue. It will also provide your company the best opportunity of recovery.
Visit for expert guidance if you want to learn more about ways to deal with bankruptcy and unfair dealing.
Also Read: What Makes Prop Trading One of the Lowest-Risk Ways to Enter the Markets?
