The Wrongful Trading procedure is not fit for purpose. The provisions have no influence on directors' decisions, as they are ineffective for holding directors liable to contribute to the losses suffered by creditors. Critically discuss.

This is a company law question

This is what I have so far:

The improper trading provisions of the Insolvency Act 1986 (IA86) are ineffective. The standard for unlawful trade is whether the director knew, or should have known, that the firm had no reasonable chance of avoiding insolvency at the time.

If the firm goes bankrupt, the director is responsible for contributing to the assets of the company for the benefit of the creditors. The exam, however, is ineffectual since it does not consider the directors' real decision-making process.

Furthermore, the test is retroactive, which means that directors may only be held accountable if the firm goes bankrupt afterwards. This implies that directors can take financial risks without fear of repercussions.

The existing unlawful trading standard is ineffective, and it should be replaced with one that considers the directors' real decision-making process. This would make it more difficult for directors to take financial risks with the firm and hold them more accountable for their decisions.

Wrongful trading is a civil procedure in law that allows a company to claim damages from a director who has breached its duty of care. Wrongful trading is where a director continues to trade a company when they know or ought to know that there is no reasonable prospect of avoiding insolvency. If the company subsequently goes into insolvent liquidation, the director can be held liable for contributing to the company's assets for the benefit of its creditors. The purpose of the procedure is to protect creditors by holding directors liable for losses incurred due to their negligence.

The current insolvency regime is based on the principle of limited liability, which means that directors are not liable for the company's debts except in certain circumstances However, the effectiveness of this procedure has been called into question, as it is ineffective in holding directors liable for losses suffered by creditors. This is because the procedure provisions are not well-defined and do not provide a clear mechanism for holding directors accountable. As a result, many directors have escaped liability by claiming that they did not act negligently or that the losses suffered by creditors were not caused by their actions. Furthermore, the procedure is also seen as unfair to directors, as it does not allow them to defend themselves against claims made by creditors. This is because the burden of proof lies with the company, not with the director.

The problem with this regime is that it is not effective in holding directors liable for their actions. It is very difficult to prove that a director knew or ought to have known that there was no reasonable prospect of avoiding insolvency. This is because directors are not required to have a detailed knowledge of the company's financial affairs and may reasonably rely on the advice of accountants and other professionals. Even if it could be proved that a director knew or ought to have known that the company was insolvent, the amount of the contribution that he or she would be required to make would be limited to the value of the assets that the company acquired during the period of wrongful trading. This is often far less than the total losses suffered by creditors.

Therefore, the current regime does not provide an effective deterrent to directors who are considering continuing to trade a company when it is insolvent. This is a serious problem, as it can lead to directors taking unnecessary risks with other people's money. It also means that creditors are often left out of pocket when a company goes into insolvent liquidation.

One way to address this problem would be to introduce a regime of strict liability for directors, whereby they would be held liable for the debts of the company regardless of whether they knew or ought to have known that the company was insolvent. This would provide a strong incentive for directors to ensure that the company's affairs were in order and make it much easier for creditors to recover their losses.

Another way to address the problem would be to introduce a system of joint and several liabilities for directors, whereby each director would be jointly and severally liable for the company's debts. This would mean that a director could be held liable for the full amount of the company's debts even if they only contributed to a small part of the total loss. This would provide a strong deterrent to directors considering continuing to trade a company when it is insolvent and ensure that creditors can recover their losses in full.

Explanation:

Wrongful trading is a civil procedure in the United Kingdom which allows a court to order a company director to make a financial contribution to the company's creditors if it can be shown that the director knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.

The wrongful trading provisions were introduced in the Insolvency Act 1986 to give creditors some protection from directors who continued to trade a company when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.

However, the provisions have been criticized as ineffective for holding directors liable for contributing to the losses suffered by creditors. In particular, the provisions have been criticized for:

1. Not having any influence on directors' decisions

2. Being difficult to prove

3. Having a low rate of success in court

4. Not providing adequate protection for creditors

The first criticism is that the wrongful trading provisions do not influence directors' decisions. This is because the provisions only apply after a company has gone into insolvency, and by that stage, it is usually too late for the creditors to recoup their losses.

The second criticism is that the wrongful trading provisions are difficult to prove. This is because it can be difficult to show that a director knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.

The third criticism is that the wrongful trading provisions have a low success rate in court. This is because it can be difficult to prove that a director knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.

The fourth criticism is that the wrongful trading provisions do not adequately protect creditors. This is because the amount of money that a director can be ordered to pay is capped at the number of losses incurred by the creditors, and this may not be sufficient to cover all of the debts owed.

In conclusion, the wrongful trading provisions are not fit for purpose. The provisions do not influence directors' decisions, as they are ineffective for holding directors liable for contributing to the losses suffered by creditors. This means that creditors are not adequately protected from directors who continue to trade a company when they know, or ought to know, that there is no reasonable prospect of avoiding insolvency.

Further readings

Corporate governance and directors' duties in the UK (England and Wales): Overview. (n.d.). Practical Law. https://uk.practicallaw.thomsonreuters.com/3-597-4626?transitionType=Default&contextData=(sc.Default)