Friday, 24 May 2013
Worried about wrongful trading?
What is wrongful trading
The simple explanation is this: If you act badly when you know the company is insolvent, then you may have some personal liability if the company is liquidated.
An example of this is where directors take deposits from customers knowing that the business is insolvent and is very unlikely to be able to deliver the goods or services that have been requested.
The directors of Farepack were accused of this as they took money for the Christmas savings club before it collapsed. In fact it turned out they were exonerated (in part) as the banks refused to put the money from deposits in a trust. This case was unusual however.
So to check for wrongful trading first of all you need to establish if the company insolvent? To establish the answer to this there are three tests:
1.Can the company pay its creditors as and when the debts fall due? This is called the cashflow test.
2.Is there more money owed to creditors than assets? This is called the insolvent balance sheet test.
3.Are there any legal actions outstanding; For instance a winding up petition.
If any of the three tests above are met, then your company is probably insolvent and you must act properly and act in the best interests of the creditors (all of them being treated in the same way).
For the full guide to wrongful trading then read our site.