1. Legal Framework

A. UK - Section 214 Insolvency Act 1986 - The Origin

Definition:
Wrongful trading = Director continues to trade when he knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.

Elements to Prove:

1. Company went into insolvent liquidation (or administration, now under s.246ZB IA 1986 as amended by Corporate Insolvency Act 2020)
2. At some time before liquidation, director knew or ought to have concluded there was no reasonable prospect of avoiding it
3. Director failed to take every step to minimize loss to creditors (s.214(3) defence)

Who is liable? Both de jure and de facto and shadow directors (s.214(7) + s.251).

Standard: Mixed objective/subjective test per s.214(4):

• Objective: What would reasonably diligent person with general knowledge, skill and experience expected of director in that role know?
• Subjective: What does this director actually know due to his special skill? (e.g., accountant director held to higher standard).

Liability: Personal contribution to assets for benefit of creditors. Unlimited. Not a fine to state, goes to creditor pool.

Difference from Fraudulent Trading (s.213): s.213 requires intent to defraud (dishonesty). s.214 only negligence. Easier to prove, so most cases are wrongful trading.

B. SPAIN - Acción de Responsabilidad por Deudas / Concurso Culpable

Spain does not have word "wrongful trading" but has equivalent:

1. Art. 367 Ley de Sociedades de Capital (LSC):
If company is in cause of dissolution (patrimonio neto < 50% capital social or losses) and directors do not call Junta in 2 months and do not file for dissolution / concurso, directors become personally, jointly and severally liable for debts incurred AFTER cause of dissolution.

This is almost strict liability, harsher than UK.

2. Art. 455-456 Texto Refundido Ley Concursal (TRLC) - Concurso Culpable:
If concurso declared culpable, directors can be:

• Declared inhabilitados 2-15 years
• Ordered to pay deficit of concurso (Art. 456.2) - "condena a la cobertura del déficit"
• Lose credits

Causes of culpability (Art. 444 TRLC) include: failure to file for concurso within 2 months of insolvency knowledge (Art. 5 TRLC), irregular accounting, etc.

Test: Very similar to wrongful trading: Director knew or should have known insolvency and did not file.

C. INDIA - Wrongful Trading Equivalent

India has no s.214 but has 4 provisions:

1. Sec 66 Insolvency and Bankruptcy Code 2016 (IBC) - Fraudulent and Wrongful Trading
Sec 66(1) - Fraudulent: Business carried on with intent to defraud - director liable to contribute
Sec 66(2) - Wrongful: Director knew company was likely to become insolvent and did not exercise due diligence to minimize loss. Can be ordered to contribute.

This is direct copy of UK s.214.

2. Sec 339 Companies Act 2013 - Fraudulent Conduct
3. Sec 340 Companies Act - Misfeasance

Standard: Same as UK - objective/subjective.

2. When Does Wrongful Trading Start? The Critical Date

The most litigated issue. Liability starts from the moment director knew or ought to have concluded no reasonable prospect of avoiding insolvent liquidation.

Indicators courts use:

• Cash flow test: Cannot pay debts as they fall due
• Balance sheet test: Liabilities > Assets
• Loss of major customer / contract
• Bounced cheques, creditor pressure
• Bank overdraft withdrawn
• Management accounts showing mounting losses
• Advice from accountant saying insolvent

The "Every Step" Defence: Director must show he took EVERY step to minimize loss, not just some steps. Examples: Stop taking credit, negotiate with creditors, seek professional advice, consider administration, reduce costs, stop dividends.

Simply resigning is NOT a defence.

3. CASE LAWS - UK (Leading Worldwide)

1. Re Produce Marketing Consortium Ltd BCLC 520 - First Case

• Facts: Two directors continued trading fruit company for 1 year while knowingly insolvent, building debt £175k.[1989]
• Held: Directors liable. Knox J defined test: Director must be judged by information he had or should have had. Taking professional advice does not automatically absolve.
• Principle: You cannot close your eyes to insolvency.

2. Re Purpoint Ltd BCC 121

• Directors continued trading after accountant warned company insolvent.[1991]
• Held: Failure to file management accounts monthly = lack of diligence. Objective standard: director of small company must still understand accounts.

3. Re DKG Contractors Ltd BCC 903

• Directors argued they hoped to trade out of difficulty.[1990]
• Held: Hope is not enough. Need reasonable prospect based on facts, not optimism. Continuing to trade on hope when no new funding = wrongful trading.

4. Re Continental Assurance Co of London plc 1 BCLC 48 - Defended Successfully

• Insurance company continued trading 4 months after technically insolvent, directors sought advice from actuaries.[1997]
• Park J: Directors not liable because they took every step, sought professional advice, and had reasonable belief rescue possible. Complex case - mere insolvency does not automatically trigger liability, need no reasonable prospect.

5. Re Ralls Builders Ltd EWHC 243 (Ch) - The £1.2M Case

• Directors continued building company after bank withdrew facility, used customer deposits to pay old debts.[2016]
• Court: Liable for £1.2M. Directors ought to have concluded insolvency when bank facility removed. Using new customer money to pay old creditors = aggravating factor.

6. Brooks & Ors v Armstrong & Anor (Re Robin Hood Centre plc) - Supreme Court Interpretation

• Supreme Court clarified s.214 defence: "Every step" means all steps a reasonably diligent director would take, not literally every possible step. But still high bar.[2016]

7. R v Lexi Holdings plc EWCA Crim 1443 - Criminal + Wrongful Trading

• Director took £20M from company for personal use while insolvent.[2008]
• Criminal conviction for fraudulent trading + wrongful trading civil liability.

8. Recent: Re BHS Group Ltd - Dominic Chappell & Others - 2020 - £6.5M

• BHS collapse. Directors continued trading BHS after acquisition with no funding.
• Court ordered Chappell to pay £9.5M for wrongful trading + misfeasance. Failed to take every step, extracted money.

9. Sequana SA UKSC 25 - Supreme Court - Creditors' Interest Duty

• Not wrongful trading but defines when directors must consider creditor interests. When insolvency probable (not just possible), directors must act in creditors' interest. This brings forward wrongful trading trigger point.[2022]

SPANISH CASE LAWS

10. STS 585/2020, 10 Nov - Art. 367 LSC

• Supreme Court: Once cause of dissolution (losses >50% capital) exists, director liability for later debts is almost automatic if he does not convene Junta in 2 months. No need to prove causation, only that debt is posterior. Harsher than UK.

11. STS 298/2012 - Concurso Culpable

• Director did not keep proper accounting, did not file concurso in 2 months. Declared concurso culpable + condemned to pay full deficit €800k under Art. 172 bis old LC (now 456 TRLC).

12. SAP Barcelona 15/2021 - Startup Wrongful Trading Equivalent

• Directors of fintech continued taking client funds while knowing insolvency, did not file concurso.
• Court: Concurso culpable, inhabilitación 5 years, pay deficit.

INDIAN CASE LAWS

13. Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd v Axis Bank Ltd (2020) 8 SCC 401 - Supreme Court on Sec 66 IBC

• Supreme Court explained Sec 66(2) wrongful trading: RP must prove director knew insolvency likely. Director can defend by showing due diligence.
• Test same as UK s.214.

14. NCLT Mumbai - SBI v. Videocon Industries Ltd (2019) - Sec 66 Action

• Directors continued trading Videocon after default of Rs. 20,000 cr, diverted funds.
• NCLT ordered directors to contribute Rs. 500 cr under Sec 66 wrongful trading.

15. NCLAT - Liberty House Group Pte Ltd v. State Bank of India - 2020

• Directors argued they relied on auditors.
• NCLAT: Reliance on professionals not enough if financials clearly showed insolvency. Same as UK Re Produce.

4. Defences That Work (and Don't)

Work:

1. Took Every Step: Immediately stopped credit, sought insolvency advice, filed for administration, kept minutes, warned creditors, reduced costs.
2. Reasonable Prospect: Had concrete funding offer, new contract, investor term sheet - not just hope.
3. Professional Advice: Sought advice from insolvency practitioner and followed it (Re Continental Assurance).
4. Accurate Management Information: Can prove you had management accounts and they showed solvency.

Don't Work:

1. I resigned: Resignation after knowledge does not erase liability for period before.
2. I am non-executive / dormant director: Still liable under objective test.
3. Accountant told me okay: If accounts obviously show insolvency, you cannot hide behind accountant.
4. We were trying to save jobs: Motive irrelevant, must minimize creditor loss.

5. Quantum - How Much Director Pays

UK s.214: Court orders contribution = increase in net deficiency from date of wrongful trading to liquidation.

Formula: Net deficiency at liquidation - Net deficiency at date when should have stopped.

Example: At wrongful trading date, deficiency £100k, at liquidation £500k, director pays £400k.

Spain Art. 367 LSC: All debts contracted after cause of dissolution.
Spain Art. 456 TRLC: Can be full deficit of concurso.

India Sec 66 IBC: Same as UK - contribution to assets as Tribunal thinks just.

6. Practical Checklist - To Avoid Liability

If you are director and cashflow tight:

1. Daily cashflow forecast 13 weeks
2. Weekly management accounts
3. Board minutes recording solvency discussion
4. Seek IP advice early - document it
5. Stop taking credit, new deposits, dividends
6. Do not pay connected parties, do not prefer one creditor
7. Consider moratorium / administration before wrongful trading date
8. File concurso within 2 months in Spain / consider administration in UK within weeks

Wrongful trading claim is brought by liquidator / administrator / resolution professional (India). Limitation: UK 6 years from liquidation, Spain 4 years for Art. 367, India 3 years under Limitation Act.