Director Responsibilities and Wrongful Trading

Running a business comes with many challenges and navigating financial hardship of a business can cause difficulties for directors. In general, when a company is financially healthy, director’s duties are typically directed towards acting in the best interests of the shareholders in a company. However, when a company is facing financial difficulties, there is a shift in responsibility, and if not adhered to there are various legal consequences that may arise if things go wrong.

What is a company in financial difficulty?

It can be challenging to determine when the tides for a company are turning and accordingly when director’s duties begin to change. A company in financial difficulty is usually characterised by a company that is unable to meet its obligations. This can be due to a variety of factors such as cash flow management issues, external economic conditions or competitive pressures. It’s crucial that directors act swiftly when they become aware that a company may be heading towards insolvency.

What is wrongful trading?

Wrongful trading becomes a serious risk for directors when a company is insolvent or approaching insolvency. Wrongful trading can take many forms, for example when directors continue to trade or incur liabilities when they know or ought to know that there is no reasonable prospect of the company avoiding insolvency. However, wrongful trading is not limited to continuing to trade, if a director continues to accumulate debt without a reasonable chance of repayment or recovery, or they fail to take action to avoid the company becoming insolvent are also forms of wrongful trading.

Repercussions of wrongful trading

If you allow your business to continue to incur liabilities at a time when you know or should know that there is no reasonable prospect of the company avoiding an insolvent liquidation there are various repercussions. One of the most significant repercussions is personal liability – directors can be ordered by the courts to contribute to the company’s assets, effectively using their own money to help repay creditors. Beyond financial penalties, directors also face the possibility of being disqualified from serving as directors for up to 15 years under the Company Directors Disqualification Act 1986, which can severely damage professional reputation and future career prospects.

To protect both your business and yourself as a director, it’s essential to stay on top of your company’s financial position and act promptly if any uncertainty arises, such as seeking professional advice to ensure you’re making informed decisions in the best interests of creditors. The corporate team at Gilson Gray specialise in insolvency and director liability matters, offering clear, practical guidance to help you navigate complex situations and minimise personal risk.

To discuss any of the points raised further, please contact a member of our Insolvency law team here.

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.