Wrongful trading was built on the notion of fraudulent trading in the Insolvency Act of 1986. This is not a criminal offence but it is a very common occurrence as it is often performed unknowingly. If your company enters insolvency ensure you are well prepared as you could be looked into.
Wrongful Trading VS Fraudulent Trading
You should be aware of which one is which before proceeding down any legal route as there are key differences between wrongful trading and fraudulent trading. You do not want to confuse these key terms.
According to the Insolvency Act 1986, Wrongful trading occurs whilst a company is insolvent and still continues to carry on their daily business trading. It's normally a case of hoping this will improve while they only get worse. This is usually a case of misjudgement or directors failing to carry out their responsibilities correctly which is different to fraudulent trading.
It is far more difficult to get orders of fraudulent trading as they require something known as ‘the burden of proof’. You basically need to be able to prove that directors have conducted business without any intent to pay their debts. Further than this, the court may proceed to find them guilty for fraudulent trading.
Is Wrongful Trading A Criminal Offence?
It is known as a civil offence but not a criminal offence. This is as per the Insolvency Act 1986 and the Companies Act 2006. Whereas, Fraudulent Trading, is classed as a criminal offence also carried by a civil liability, meaning it gives a person rights to obtain redress from another person.
Fraudulent trading would be triable either in the Magistrates’ Court or Crown Court.
What Insolvency Practitioners Look For
The Insolvency Practitioner will also act as the liquidator when a business is going under, and will determine if wrongful trading has taken place. Here is a list of the things they will be on the lookout for:
Not filing annual returns at Companies House
Failing to file annual or audited accounts at Companies House
Not operating the PAYE scheme correctly, failing to pay PAYE and NIC when due and building up arrears
Failing to operate the VAT scheme correctly and building up arrears
Taking excessive salaries that the company cannot afford
Repaying a director loan made to the company while other creditors were not paid
Trading while insolvent
Taking credit from suppliers when there was ‘no reasonable prospect’ of paying the creditor on time
Wilfully piling up debt
Taking deposits from customers when you know the product or service will not be delivered