HomeFWJ TakeawayResourcesWhat Defences exist to a Wrongful Trading of Fraudulent Trading claim?

Again, as with all litigation, the circumstances are subjective and a Defence may largely be by reference to that Director’s role and the Director’s fiduciary duties.

The Burden of Proof for Fraudulent Trading claims is much higher and accordingly a Liquidator will almost always look to issue the easier to prove claim for Wrongful Trading.  The only exception to this will be where the Defendant is not a Director, as claims for Wrongful Trading cannot be brought against non-Directors.

A Director responding to a Wrongful Trading claim does not have an ability to avail themselves of the statutory Defence under Section 1157 Companies Act 2006, namely that they acted with honesty and integrity, as the Directors all have a joint responsibility for any decisions ultimately made by the Company (and thus the need to ensure supervision of co-Directors as described above).

The absence of proper accounts or reports may be a Defence to a non-executive or part-time Director.  However, the general rule is that the test is by reference to the Director’s knowledge, skills and experience (note: becoming involved in a business that the Director had no experience in is not a Defence) and the evidence of his/her honesty and conscientiousness.

Where a Director does not attend a Board Meeting at which decisions (which may have led to the Wrongful Trading Scenario) have been passed, then the non-attendance will not be a Defence.

With regard to Fraudulent Trading, it may sometimes be the case that only one creditor (rather than creditors as a whole) has been defrauded.  In these circumstances it may be that the Liquidator is not the correct party to make such a claim against the wrongdoer Director, and that such a claim should be made by the creditor themselves (although they must bring a different type of claim as they cannot bring proceedings for Fraudulent Trading).

Other than the general Defences referred to under the previous point, Section 214 (3) provides a statutory defence to any such claim where:

“That person took every step with a view to minimising the potential loss to the company’s creditors…”

Accordingly, it is vital that proper detailed records are always maintained by the Company and that, as a Director, you can always demonstrate that as at the “point of insolvency” you acted to prevent further debts accruing, avoiding losses to creditors and preserving the value of the Company’s assets (with a view to them being realised in Liquidation).

Any steps taken which increase creditors or erode the Company’s asset value will mean that this Defence is unavailable.

Contact us in confidence