Sometimes a company's activities do not run as expected and it can no longer pay its debts. If, as a director, you then fail to file for bankruptcy on time, the concept of wrongful trading may come into the picture. This concept sounds very American, but it is also a ground for directors' liability in Belgium. What is it, and what are its consequences? We would like to explain that further in this fourth and final part of blogs on directors' liability in the context of bankruptcy.
If a company goes bankrupt, a director's liability is not automatically compromised. In addition to the 'ordinary' grounds for directors' liability (see part 1), there is also the special bankruptcy liability. By this we understand, among other things, directors' liability pursuant to:
- non-payment of payroll withholding taxes, VAT and social security contributions;
- Obvious gross misconduct; and
- wrongful trading.
The first two grounds for directors' liability in this list have been discussed in previous blogs (part 2 and part 3).
In this paper, we want to shed light on the third and final ground of the aforementioned list, namely "wrongful trading".
Under the law, there is wrongful trading if:
- the (former) director[1] continued the business, when at any time before bankruptcy it knew or should have known that there was manifestly no longer any reasonable prospect of maintaining the business or its activities and avoiding bankruptcy; and
- the (former) director from the moment referred to in (i) did not act as a normally prudent and diligent director would have acted in the same circumstances.
In summary, wrongful trading thus involves the continuation of a loss-making activity/company, where the director knew or should have known that this company no longer had any reasonable prospects of avoiding bankruptcy, leading the interests of creditors be affected.
An example of wrongful trading is when a director decides to make several additional investments in the company's operations, while knowing that sales and revenues have fallen drastically. By acting this way, the director wrongfully keeps the company alive and additional debts are incurred that the director knows (or should know) the company will not be able to pay. This affects the recourse of existing creditors. However, this is a thin line, as a director should also be able to take the last chances he reasonably considers useful to save the company. The continuation of a serious loss-making activity thus does not always involve a disregard for the interests of creditors. The court will therefore always have to take all the circumstances into account in its concrete assessment.
What is now the sanction If so, would it be held that a director was guilty of wrongful trading? If, in the context of bankruptcy, debts are found to exceed income, (former) directors can be ordered personally (and jointly and severally or otherwise) to bear all or part of the net liabilities. A potentially severe sanction, therefore.
Only the bankruptcy trustee can bring a claim to that effect.
So how can you, as a director, avoid being found guilty of wrongful trading? Below we provide some tips:
- Closely monitor the company's financial situation. For example, make sure that regular financial reports (external or otherwise) are prepared so that you have a clear picture of the company's financial situation.
- Make sure the steps you take to save the company are documented and include clearly your reasoning as a director.
- Be transparent to creditors and inform them of any financial problems in a timely manner.
- Seek timely help from an expert, such as an accountant or lawyer, to help assess whether the company's activities can still be continued responsibly or whether it is time to proceed with filing for bankruptcy.
Are you concerned about your directors' liability potentially being compromised, whether in bankruptcy or otherwise? Then be sure to contact us (maren.deracourt@vsadvocaten.be).
[1] This includes the business manager, daily manager, de facto manager and members of the management or supervisory board
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