Wrongful trading

It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company.

In order to establish liability, the liquidator needs to demonstrate, using the civil burden of proof (i.e. on the balance of probabilities) that the directors continued trading the company beyond a point in time when they knew, or ought to have ascertained, that insolvent liquidation was inevitable.

This principle has been confirmed in a 1999 case where an executive husband had to pay £210,000 to the liquidator compared with his non-executive wife's £50,000.

Many legal systems (including English law) recognise the blue sky defence; which broadly provides that, if the directors, in good faith, believed the company was about to turn the corner and improve, they would not normally be held liable for continuing to trade.

Liability only attaches when the company has no realistic prospect of avoiding insolvent liquidation.

This was on the basis of the judge's "guesstimate" that 70% of the drop in net assets was due to the actions of the directors, and 30% could be attributed to extraneous causes.

In most instances there would have been substantial bank borrowings secured by a debenture and personal guarantees given by the directors.

Many directors chose not to fight the claims, reasoning that any amounts paid to company (hence the bank under its mortgage security) via a wrongful trading claim, simply reduced the director's liability under their personal guarantees.

This changed with the Court of Appeal's decision in 1998 that a claim for wrongful (or fraudulent) trading, is different from a normal 'asset' of the company.

This was found to be the case following a 5 months trial in which the liquidator of Continental Assurance Company of London plc sued a number of its directors.

[10] The decisions in Continental Assurance and Leyland Daf make wrongful trading actions unattractive to liquidators.

It is now usual practice for liquidators to enter into conditional fee arrangements with lawyers and have insurance against adverse costs in place in the event that he is unsuccessful (although the Ministry of Justice has announced that an exemption allowing these arrangements will end in April 2016).