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Head of Commercial Recoveries
When a company goes into liquidation, one of the questions which the Liquidator asks is whether there has been wrongful trading. Section 214 of the Insolvency Act provides that where a director knew, or should have known, that the company was likely to become insolvent but failed to take the necessary steps to minimise the losses of creditors, he is guilty of wrongful trading.
To assess whether a director was guilty of wrongful trading, a subjective/objective test is applied. The first part of the test is what a competent director in the director’s position should have known and what action they should have taken (the objective test). This is then applied to the director’s actual knowledge, skill and experience (the subjective test). If a director has a professional qualification, this will increase the level at which the test is applied to him.
Whilst wrongful trading is something that Liquidators will look out for, as a result of the evidential challenges in establishing the fault of the director and getting creditors to fund the action, the number of successful claims against directors is quite low.