Ron doesn't owe HMRC tax (as far as I know anyway), Southend United owes tax. Ron might own us but we're a limited company and the whole point of limited companies is that their taxes are separate from the owner. Unless he's done something like using his personal property as collateral for loans (which wouldn't surprise me, I can't see who would loan us money at the moment without that) Southend can go bust and his personal finances won't be affected.
What is wrongful trading?
Wrongful trading or 'trading irresponsibly' is a civil offence and is covered by section 214 of the Insolvency Act 1986
According to the 1986 Act, it occurs when company directors have continued to trade when:
“They knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation”
They did not take “every step with a view to minimising the potential loss to the company’s creditors”
Essentially, directors must be found to have acted reasonably and responsibly in the time preceding the company’s insolvency to avoid wrongful trading proceedings. They must always have put creditors' interests first, and not worked for their own benefit.
If directors are found guilty of wrongful trading, they can be held personally liable for the company’s debts from the point they knew the company was insolvent.
In some cases, they can also be disqualified from being a director, fined or even imprisoned.
What actions constitute wrongful trading?
The liquidator, who must be an insolvency practitioner, determines if wrongful trading has occurred. This occurs during their mandatory assessment of the director’s conduct. There is a six-year limitation period, so you will not be charged after this time has passed.
Examples of behaviour or actions they’ll look 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.
You will be at risk of being accused of wrongful trading if you have engaged in any of the above. To avoid this, you must always act in the creditors' best interest. This even means prioritising their payments over personal and bank guarantees.
It’s important to note that wrongful trading can only apply in terminal insolvency.
Put simply, this means it can only apply when the business is no longer viable. It will only begin after formal insolvency proceedings, such as liquidation or administration.
However, if there is no insolvency event and you still partake in suspicious behaviour, be very careful. Keep records of all actions concerning these points, as well as of board and shareholder meetings. This may protect you in the future.
