Wrongful trading
The directors of a company on the edge of insolvency must be careful to avoid the risk of liability for wrongful trading under the Insolvency Act 1986.
Wrongful trading is where directors continue to trade after the company has become insolvent - in such circumstances the directors can be sued personally for losses made by the creditors.
- Ensure you obtain professional advice as soon as possible in respect of all major decisions of the company
- Hold regular board meetings with all directors so they are aware of the financial situation
- Consider all possible sources of funding and document this
- Set up a strict timetable for obtaining funding identifying when the company's failure to meet a deadline will mean there is no reasonable prospect of the company avoiding insolvent liquidation
- Don't ignore it if judgments are entered into against the company or creditors put pressure on the company
- Take every step to minimise potential loss to creditors - don't simply resign to circumvent the problem
- Ensure the company does not incur any new significant liabilities until further funding secured (unless it is in the best interests of the company to do so)
- Keep up to date with financial information of the company rather than waiting for a winding up petition to bring to light any problems
- Check the terms of any D&O insurance policy
- Keep written records of all meetings and discussions
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