The Liquidator of a Company can look back at the trading history of a Company to determine whether it traded on for too long, incurring debts, at the expense of creditors.
The power of a Liquidator to obtain a Court Order for Wrongful Trading is set out at s214 of the Insolvency Act 1986.
If successful the Court has a wide discretion to declare that the person facing those proceedings has to make such contribution as the Court sees fit.
The Liquidator must be able to show that at some point prior to the Company going into insolvent liquidation the director(s) knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation. In addition to this a director ought to have been very careful in obtaining credit in circumstances in which he/she knew that it would not be repaid as this may amount to a criminal offence.
The Court will not make an Order for contribution where it is satisfied that every step was taken to avoid losses to creditors according to the skill, knowledge and experience of the director concerned.
The following are some of the warning signs that directors may be wrongfully trading –
A more serious situation uncovered by a Liquidator when investigating the trading of a Company is Fraudulent Trading. The power of the Court to consider applications of Fraudulant Trading is at s213 Insolvency Act 1986.
Where it appears to the Liquidator that the business of the Company was run with the intent to defraud creditors the Liquidator can ask the Court to –
(a) Declare that (the person being pursued) is guilty of Fraudulent Trading; and
(b) Order that contributions be made by that person in the amount that the Court thinks proper
It ought to be bourn in mind that Fraudulent Trading is also a criminal offence carrying a custodial sentence.
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